<PAGE>
The following items were the subject of a Form 12b-25 and
are included herein: Items 1, 6, 7, 7A, 8 and portions of 14.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Amendment No. 1
To
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended October 31, 1999
or
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-23001
----------------
SIGNATURE EYEWEAR, INC.
(Exact name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
California 95-3876317
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation Or Organization) Identification No.)
498 North Oak Street
Inglewood, California 90302
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, Including Area Code: (310) 330-2700
----------------
Securities Registered Pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each Class Name of each Exchange on which Registered
------------------- -----------------------------------------
<S> <C>
None
</TABLE>
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
----------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulations S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
On January 21, 2000, the Registrant had 5,083,989 outstanding shares of
Common Stock, $.001 par value. The aggregate market value of the 2,218,660
shares of Common Stock held by non-affiliates of the Registrant as of January
21, 2000 was $6,101,315.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for its 2000 Annual Meeting of
Shareholders are incorporated by reference into Part III of this Form 10-K.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART I
The discussions in this Form 10-K contain forward-looking statements that
involve risks and uncertainties. Important factors that could cause actual
results to differ materially from the Company's expectations are set forth in
"Factors That May Affect Future Results" in Item 7, as well as elsewhere in
this Form 10-K. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by "Factors That May Affect Future Results." Those
forward-looking statements relate to, among other things, the Company's plans
and strategies, new product lines, relationships with licensors, distributors
and customers, and the business environment in which the Company operates.
Item 1--Business
General
Signature Eyewear, Inc. and its subsidiaries ("Signature" or the "Company")
design, market and distribute prescription eyeglass frames and sunglasses,
primarily under exclusive licenses for Laura Ashley Eyewear, Eddie Bauer
Eyewear, Hart Schaffner & Marx Eyewear, and Nicole Miller Eyewear, as well as
its proprietary brands, including Dakota Smith. During fiscal 1999, the
Company acquired brand-name licenses for COACH Eyewear, Eddie Bauer
Performance Sunwear (featuring the patented lens technology of Oakley, Inc.),
and bebe eyes. The Company expects to launch those collections in the spring
of 2000. The Company obtained the Dakota Smith line, and the license for the
Nicole Miller line, as part of its acquisition of the assets of California
Design Studio, Inc. in June 1999 (the "CDS Acquisition").
The Company attributes its success to its brand-name development process,
high quality, creative frame designs and its innovative sales programs. The
Company's brand-name development process includes identifying a market niche,
obtaining the rights to a carefully selected brand name, producing a
comprehensive marketing plan, developing unique in-store displays and creating
innovative sales and merchandising programs for independent optical retailers
and retail chains.
Before October 1, 1999, the Company distributed its products to independent
optical retailers in the United States primarily through exclusive
distributors. During the nine months ended July 31, 1999, sales through United
States distributors accounted for approximately 37% of the Company's total net
sales. Effective as of October 1, 1999, the Company terminated all but two of
its 24 United States distributors and hired its own national direct sales
force, which numbered 92 sales representatives at December 31, 1999 (with a
target of 130 sales representatives by the end of fiscal 2000). The Company
made this conversion to stimulate sales growth by enabling the Company to work
more closely with the sales representatives selling its products, who are
dedicated to selling only the Company's products, and to require its sales
representatives to implement the Company's marketing plans.
The Company's conversion to a direct sales force in the United States has
had several material impacts on the Company. The Company incurred significant
expenditures in connection with the conversion, including the employment of
additional sales executives, sales representatives, customer service and
distribution personnel and other support personnel, in computer hardware and
software, telephone and warehouse distribution infrastructure. In addition,
following the announcement in August 1999 of the conversion, distributors
significantly reduced their selling efforts and returned inventory.
Distributor inventory returns increased from $2.8 million in fiscal 1998 to
$6.8 million in fiscal 1999, and the Company's gross sales (sales before
returns) to United States distributors decreased from $20.3 million in fiscal
1998 to $19.1 million in fiscal 1999.
The Company's best-selling product lines are Laura Ashley Eyewear and Eddie
Bauer Eyewear. Its most successful line is Laura Ashley Eyewear, which was
launched in 1992. Frames in the Laura Ashley Eyewear line are feminine and
classic, and are positioned in the medium to mid-high price range. The Eddie
Bauer Eyewear collection, launched in March 1998, offers men's and women's
styles, and is positioned in the medium-price
2
<PAGE>
segment of the brand-name prescription eyewear market. The Eddie Bauer name is
widely recognized for its outdoor heritage, casual styling, and reputation for
value and quality. Net sales of Laura Ashley Eyewear and Eddie Bauer Eyewear
together accounted for 77% and 75% of the Company's net sales in fiscal 1998
and fiscal 1999, respectively.
To promote sales, Signature produces "turnkey" marketing, merchandising and
sales promotion programs, and provides innovative loyalty programs benefiting
the Company and its participating retailers. Under the loyalty programs, each
participating retailer agrees to purchase a specified quantity of frames of
new styles released during the program period, although the participant may
cancel at any time. These "automatic" sales programs have facilitated the
widespread placement of new styles in optical retail stores, and have
increased the Company's leverage with its manufacturers due to the large size
of the Company's orders. Over 20% of the independent optical retailers in the
United States participated in one or more of the Company's Loyalty Programs in
fiscal 1999. The Company expects to market an innovative new Loyal Partners
Program in fiscal 2000, offering styles from almost all of its current
designer lines and house brands. The new program will have three levels of
rewards, based upon the participant's purchase commitment.
Industry Overview (1)
Eyewear Consumers. Optical retail sales in the United States have increased
during the 1990s. Retail sales of all eyewear products increased from $11.4
billion in 1990 to $15.8 billion in 1998. Correspondingly, retail sales of
eyeglass frames increased from $3.87 billion in 1990 to approximately $5.0
billion in 1998. In 1998, approximately 162.8 million Americans, just over 60%
of the nation's population, needed some form of vision correction (either
eyeglass frames with corrective lenses or contact lenses). More than 93% of
people over the age of 45 need corrective eyewear, many due to presbyopia, a
condition which makes it difficult to focus on nearby objects, such as small
newspaper print. The table below demonstrates how the number of people needing
vision correction increases with age.
Age Breakdown of U.S. Population Needing Vision Correction
<TABLE>
<CAPTION>
Age Group of
Purchasers
as % of Total
1998 Purchasers of % of Age
Population Vision Group Needing
Age (In Millions) Correction Vision Correction
--- ------------- ------------- -----------------
<S> <C> <C> <C>
0-14 58.1 5.9% 16.5%
15-24 37.1 9.4 41.2
25-44 83.2 32.1 62.8
45-64 57.2 32.9 93.5
65 and up 34.3 19.7 93.7
----- ----- ----
Total 269.9 100.0%
===== =====
</TABLE>
- --------
(1) Unless otherwise noted, all the data in this Industry Overview section
relates to the eyewear market in the United States. The source for this
data is the 1999 U.S. Optical Industry Handbook published by Jobson
Publishing Corporation in March, 1999.
The average age of the United States population is expected to increase
over the next 25 years, due to the aging of the "baby-boomers" born between
1946 and 1964. As more of the baby-boomers exceed age 45, the Company believes
more people will have vision impairment, and sales of corrective eyewear
should increase.
Sales of eyewear have also increased due to the evolution of eyewear into a
fashion accessory. Until the mid-1970s, eyeglass frames were viewed as medical
implements which were "dispensed" but never "sold." Because styling was not
emphasized, successful frames often remained popular for years, and sometimes
for decades. In the mid-1970s, experts from other industries introduced
designer names and consumer advertising to
3
<PAGE>
the optical industry, as well as sweeping design changes. These changes
resulted in increased consumer demand for the new products. Although eyeglass
frames are a fashion accessory for many people, the styles are not subject to
seasonal changes, and they change less rapidly than styles in the apparel
industry.
Competitive Vision Correction Methods. Currently, there are two methods of
correcting vision impairment which compete with prescription eyeglasses:
contact lenses and surgery. Although retail sales of contact lenses remained
flat from 1995 through 1999 at $1.9 billion, their sales as a percentage of
total retail sales decreased from 13.5% in 1995 to 12% in 1999. The Company
believes that sales of contact lenses do not currently materially threaten
eyeglass frame sales because many people who wear contact lenses need a pair
of eyeglasses for night time and for the days when they decide not to wear
their contact lenses.
A number of surgical techniques have been developed to correct vision
problems such as myopia (nearsightedness), hyperopia (farsightedness) and
astigmatism. Vision correction surgery by laser has recently become
increasingly popular, with an estimated 850,000 operations performed in 1999.
Nonetheless, the Company does not believe that these techniques will
materially and adversely affect sales of prescription eyewear in the near
future. The Company believes that a number of people who have had successful
eye surgery may still need some form of corrective eyeglasses, and others may
need eyeglasses at a later date due to the onset of presbyopia. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition--Factors That May Affect Future Results--Availability of Vision
Correction Alternatives."
Optical Retail Outlets. Optical retailers consist of optometrists,
opticians and ophthalmologists. There are two main types of optical retailers:
independents (with one or two stores) and chains. Chains include national
optical retailers such as LensCrafters, Cole Vision Corp. and its subsidiary
Pearle Vision, and EyeCare Centers of America, and mass merchandisers such as
Wal-Mart and Price Club. In 1999, independent optical retailers had a 60.3%
market share, national optical retailers had a 32.9% market share, mass
merchandisers had a 4.7% market share, and managed care organizations had a
2.1% market share.
Growth Strategy
During fiscal 1999, the Company entered a new stage of its development.
Most significantly, the Company changed its method of distributing its
products in the United States, becoming a national direct seller to
independent optical retailers. The Company also entered into license
agreements for new, nationally recognized brands, and decided to expand its
presence both internationally and in the sunglass markets. The Company expects
to expand upon these developments with these future growth strategies:
New Product Lines. The Company intends to launch its new brand-name
collections, COACH Eyewear, Eddie Bauer Performance Sunwear (with Oakley's
patented XYZ lens technology), and bebe eyes in the Spring of 2000.
Existing Licensed Brands. The Company intends to continue creating
innovative marketing, merchandising and sales promotion programs to
increase the market penetration of its existing lines of licensed brand-
name eyewear, including Nicole Miller eyewear, which it obtained in the CDS
Acquisition.
Signature's Own Lines. Signature intends to add new collections of its
own lines, targeting different market niches. In addition, the Company
intends to apply its marketing and sales techniques to Dakota Smith
Eyewear, the proprietary brand obtained through the CDS Acquisition.
Sunwear. The Company has created a new sunglass division to manage its
increased efforts to market and promote its new sunglass collections, Eddie
Bauer Performance Sunwear, COACH Sunwear and bebe eyes sunwear. The Company
also intends to increase the market penetration of its existing sunwear
lines, including Nicole Miller Sunwear, Dakota Smith Sunwear and Laura
Ashley Sunwear.
Direct Sales Force. The Company intends to to increase its market
penetration to independent optical retailers in the United States, using
its new national direct sales force.
International Sales. The CDS Acquisition presents opportunities for
growth in international sales. The Company intends to introduce and promote
additional product lines in the countries where California Design Studio
products are sold, and in the countries where Signature's own brand-name
collections have been sold.
4
<PAGE>
Brand Development
The Company attributes its success to its brand-name development process,
its frame designs, and its innovative sales techniques. The Company's brand-
name development process includes identifying a market niche, obtaining the
rights to a carefully selected brand name, producing a comprehensive marketing
plan, designing frames consistent with each brand image, developing unique in-
store displays, and creating innovative sales and merchandising programs for
independent optical retailers and retail chains.
Identifying a Market Niche and Obtaining the Rights to a Brand
Name. Signature's brand-name development process begins with identifying an
eyewear market niche. The Company characterizes a market niche by referring to
the target customer's gender and age (e.g., adult, child, teenage), the
niche's general image and styling (e.g., feminine, masculine, casual), its
price range, and the applicable channels of distribution. Once the Company
chooses a market niche, a brand name is identified which the Company believes
will appeal to the target customer in that niche. The Company believes that
for a brand name to have the potential for widespread sales in the optical
industry, the name must have strong, positive consumer awareness, a
distinctive personality and an image of enduring quality. Brands that are
aimed at narrower niches can also have optical industry impact (albeit
smaller), so long as consumer awareness exists within the targeted niche. The
Company's existing license agreements contain terms limiting the ability of
the Company to market competing brand names. See Item 7--"Management's
Discussion and Analysis of Results of Operation and Finandial Conditions--
Factors That May Affect Future Results--Limitations on Ability to Distribute
Other Brand-Name Eyeglass Frames."
After the Company has determined that a targeted brand name is available,
the Company develops (i) an in-depth understanding of the potential licensor's
market position, (ii) innovative strategies for extending the brand's image to
the eyewear market, (iii) preliminary plans for merchandising, advertising and
sales promotion, and (iv) broad concepts for frame design. Once the Company
has acquired an exclusive eyewear license for a brand name, it develops
detailed concepts for frame designs, establishes the brand's identity within
the optical industry, and sets forth the first year's merchandising,
advertising and sales promotion plans.
Frame Design. The Company's frame styles are developed by its in-house
design team, which works in close collaboration with many respected frame
manufacturers throughout the world to develop unique designs and technologies.
Initially, each of the Company's frame designers works individually with a
factory to develop new design concepts. Once the factory develops a prototype,
the designer presents the style to the Company's frame committee for approval.
Once approved, Signature then contracts with the factory partner to
manufacture the style. By these methods, Signature is able to choose the
strengths of a variety of factories worldwide, and to avoid reliance on any
one factory. To assure quality, Signature's designers continue to work closely
with the factory at each stage of a style's manufacturing process.
The Company's metal frames generally require over 200 production steps to
manufacture, including hand soldering of bridges, fronts and endpieces. Many
of the Company's metal frames take advantage of modern technical advances,
such as thinner spring hinges (which flex outward and spring back) and lighter
metal alloys, both of which permit the manufacture of frames which are thinner
and lighter while retaining strength. The Company also takes advantage of
technical advances in plastic frames, such as laminated plastics that are
layered in opposing or complementary colors, and extra-strong plastics that
can be cut super thin. In its Eddie Bauer Performance Sunwear, the Company
plans to incorporate Oakley's patented XYZ lens technology featuring lenses
that allow for maximum clarity and minimum distortion.
Quality Control. The Company uses only manufacturers it believes capable of
meeting its criteria for quality, delivery and attention to design detail.
Signature specifies the materials to be used in the frames, and approves
drawings and prototypes before committing to production. The Company places
its initial orders for each style at least six months before the style is
released, and requires the factory to deliver several advance shipments of
samples. The Company's quality committee examines all sample shipments. This
process provides sufficient time to resolve problems with a style's quality
before its release date. The Company's quality committee selectively examines
frames in subsequent shipments to ensure ongoing quality standards. If, at any
5
<PAGE>
stage of the quality control process, frames do not meet the Company's quality
standards, then the Company returns them to the factory with instructions to
improve the specific quality problems. If the quality does not meet the
Company's standards before a style's release date, the Company returns all
frames in a style to the factory, and the style is not released.
Marketing, Merchandising and Sales Programs. Signature produces "turnkey"
marketing, merchandising and sales promotion programs to help optical
retailers, as well as the Company's sales representatives, promote sales. For
optical retailers, the Company develops unique in-store displays, such as its
Laura Ashley Eyewear "store within a store" environments. For the sales
representatives who call on retail accounts, the Company creates presentation
materials, marketing bulletins, motivational audio and video tapes and other
sales tools to facilitate professional presentations.
Loyalty Programs. The Company attributes a significant portion of its
success with independent optical retailers in the United States to its loyalty
programs. Under these programs each participating retailer agrees to purchase
a specified quantity of frames (generally three to six frames per month) of
new styles released for that brand during the program period. The Company's
loyalty programs benefit the Company through the automatic sales and the
reorders they generate, and benefit retailers through sales of new styles,
program-ending gifts and from the special in-store merchandising.
The Company's most successful loyalty programs have been its Laura Ashley
Eyewear Loyal Partners Program and its Eddie Bauer Eyewear Loyal Partners
Program. At October 31, 1999 the programs had a total of approximately 4,650
domestic participants and approximately 700 international participants. Each
domestic participant agreed to purchase at least 33 Laura Ashley Eyewear
frames and/or a total of 36 Eddie Bauer Eyewear frames in accordance with its
release schedule. Before fiscal 1999, most participants in the Company's
loyalty programs completed each annual program, and renewed their
participation in ensuing years. After the Company's August 1999 announcement
that it would cease selling to its distributors, approximately 34% of the
participants in the 1999 Laura Ashley Loyal Partners Program and the 1999
Eddie Bauer Loyal Partners Program canceled their participation.
Over 20% of the independent optical retailers in the United States
participated in one or more of the Company's 1999 loyalty programs. The
Company expects to provide a changed Loyal Partners Program in fiscal 2000,
that will offer styles from most of its current brands, including styles from
collections acquired during fiscal 1999, and styles from the Company's
proprietary collections.
Products
The Company's principal products during fiscal 1999 were eyeglass frames
sold under the brand names Laura Ashley Eyewear, Eddie Bauer Eyewear, Hart
Schaffner & Marx Eyewear, Nicole Miller Eyewear and Dakota Smith Eyewear.
During fiscal 1999, the Company obtained licenses for COACH Eyewear, Eddie
Bauer Performance Sunwear with Oakley's patented XYZ lens technology, and bebe
eyes, which it intends to launch in the Spring of 2000. Through the CDS
Acquisition in June 1999, the Company acquired ownership of the proprietary
brand name Dakota Smith and the license for Nicole Miller Eyewear. During
fiscal 1999, the Company began selling prescription eyeglass frames under the
Company's own label. The Company expects that this collection will have
approximately seven segments, each targeting a different market sector.
The Company also has a division that distributes eyeglass frames both under
the Company's own private-label brand as well as other companies' brands, and
a division that sells brand-name close-outs at discounted prices.
6
<PAGE>
The following table provides certain information about the market segments,
introduction dates and approximate retail prices of the Company's products.
<TABLE>
<CAPTION>
Approximate
Customer Retail
Brand Name/Segment Gender/Age Introduction Date Prices(1)
------------------ ----------- --------------------------- -----------
<S> <C> <C> <C>
Licensed Brands
bebe eyes
Prescription........... Women Spring 2000 expected launch $90-$125
Sunwear................ Women Spring 2000 expected launch $60-$90
COACH Eyewear
Prescription........... Unisex Spring 2000 expected launch $170-$215
Sunwear................ Unisex Spring 2000 expected launch $120-$180
Eddie Bauer
Prescription........... Men/Women March 1998 $100-135
Performance Sunwear
with Oakley's patented
Lenses................ Men/Women Spring 2000 expected launch $89-159
Hart Schaffner & Marx.... Men September 1996 $140-170
Laura Ashley
Prescription........... Women March 1992 $125-$180
Sunwear................ Women March 1993 $80-100
Petites................ Girls/Women June 1993 $80-100
Nicole Miller (2)
Prescription........... Women 1993 $90-$120
Sunwear................ Women 1993 $75-$115
House Brands
Camelot
Prescription........... Men/Women 1986 $70-$130
Prescription........... Unisex 1987 $70-$130
Prescription........... Boys/Girls 1987 $60-$90
Dakota Smith (2)
Prescription........... Unisex 1992 $90-$125
Sunwear................ Unisex 1992 $80-$100
Signature Collection
Brand X................ Unisex Launch expected 2000 $85-$95
Bravado................ Men 1999 $80-$90
Intuition.............. Women 1999 $80-$90
Lifescape.............. Women 1999 $60-$70
Open Road.............. Unisex Launch expected 2000 $80-$90
Search................. Unisex 1999 $80-$140
Small Print............ Men/Women Launch expected 2000 $80-$90
</TABLE>
- --------
(1) Retail prices are established by retailers, not the Company.
(2) Obtained by the Company in June 1999 in connection with the CDS
acquisition.
Laura Ashley Eyewear
The Company's first major eyewear line, and still its largest, is Laura
Ashley Eyewear, which was introduced in 1992. With net sales of $19,021,000 in
fiscal 1999, The Laura Ashley Eyewear Collection remains one of the leading
women's brand-name collections in the United States.
Signature pursued Laura Ashley for its strong female following; its feminine
image; its significant worldwide retail presence; and its distinctive, high
quality fabrics, home furnishings and clothing. Like Laura
7
<PAGE>
Ashley clothing and home furnishings, Laura Ashley Eyewear has been designed
to be feminine and classic, and fashionable without being trendy. The hallmark
of Laura Ashley Eyewear is its attention to detail, and the collection is
known for its unique designs on the styles' temples, fronts and end pieces.
The majority of Laura Ashley Eyewear styles have been designed to reach a
broad segment of the women's eyewear market. The designs in the "City
Collection" are more fashion-forward, and are aimed at a slightly younger
women's market. The designs sold as "Laura Ashley Petite," introduced in
fiscal 1999, come in smaller sizes, and are aimed to reach women and girls
with smaller faces, regardless of age.
Signature's in-house merchandising team has conceptualized and designed
unique in-store "environments" to attract the target customer to the frames.
These "environments" are modular, so that a small display is an integral part
of a larger one, and they can be customized for large customers. Most Laura
Ashley Eyewear environments are covered with colorful Laura Ashley textured
floral-print fabric, providing the retailer with, in effect, a Laura Ashley
"store within a store."
The Company has the exclusive right to market and sell Laura Ashley Eyewear
through a license with Laura Ashley entered into in May 1991. The license
covers a specified territory including the United States, Canada, the United
Kingdom, Australia, New Zealand, Colombia, France, Belgium, and the
Netherlands. The Company also has a right of first refusal to distribute Laura
Ashley Eyewear in Mexico and all other European countries. The Laura Ashley
license terminates in 2001, but may be renewed by the Company at least through
January 2006 so long as the Company is not in breach of the license agreement
and generates the required amount of minimum net sales. Laura Ashley may
terminate the license before its term expires under certain circumstances,
including if a material breach of the license agreement by the Company or if
the management or control of the Company passes from Bernard Weiss and Julie
Heldman to other parties whom Laura Ashley may reasonably regard as
unsuitable.
Eddie Bauer Eyewear
The Company pursued the Eddie Bauer name, which had not previously been
licensed for prescription eyewear, for its widespread name recognition,
outdoor heritage, casual styling, and reputation for value and quality. Eddie
Bauer currently has over 580 retail stores worldwide, and annually distributes
approximately 100 million Eddie Bauer merchandise catalogs. Eddie Bauer, which
was founded in 1920, is a subsidiary of Spiegel, Inc.
The Eddie Bauer Eyewear collection includes men's and women's prescription
eyewear styles that are coordinated to capture the Eddie Bauer casual
lifestyle image, and its outdoor heritage. Eddie Bauer Eyewear's 1999 frame
designs are known for their innovative weathered colorations and warm, patina
finishes. Several newer Eddie Bauer Eyewear styles have been produced using
high-density plastics as well as titanium, a light-weight, extremely strong
and long-lasting metal. Along with its marketing, merchandising and sales
promotion programs, the Company has designed point-of-sale graphic displays
that are also inspired by Eddie Bauer's outdoor image, and the Company's
point-of-sale graphics also use the same models shown in Eddie Bauer catalogs,
to bring the Eddie Bauer image into retail optical stores. In keeping with
Eddie Bauer's commitment to value, the collection consists of medium priced
frames, a market-pricing niche which does not currently have many brand-name
competitors.
In March 1999, the Company entered into an amendment to its license
agreement with Eddie Bauer, permitting the Company to market and sell Eddie
Bauer Performance Sunwear using the patented XYZ lens technology of Oakley,
Inc. ("Oakley") to optical retailers. The Company also reached an agreement
with Oakley, to supply its patented XYZ optical lenses for use in Eddie Bauer
sunglasses. Oakley, one of the largest manufacturers of sunglass frames and
lenses in the world, is well known for the quality of its lenses and its
inventive sunglass frame designs. Eddie Bauer Performance Sunwear is styled to
be a quality collection of performance sunwear for men and women that combines
the outdoor-inspired lifestyle of Eddie Bauer with the advanced technology of
Oakley XYZ lenses, that permit maximum clarity and provide minimum distortion.
The Company expects to launch the new Eddie Bauer Performance Sunwear line in
the spring of 2000.
8
<PAGE>
The Company has the exclusive worldwide right to market and sell Eddie
Bauer Eyewear through a license agreement with Eddie Bauer entered into in
June 1997. Without the prior written consent of Eddie Bauer, however, the
Company may market and sell Eddie Bauer Eyewear only in the United States and
in the other countries specified in the license agreement, most notably Japan,
the United Kingdom, Germany, France, Australia and New Zealand. The license
agreement terminates in December 2002, but the Company may renew it for two
three-year terms (one year for sunwear), provided the Company meets certain
minimum net sales and royalty requirements and is not in material default.
Eddie Bauer may terminate the license before the expiration of its term under
certain circumstances, including if (i) a person or entity acquires more than
30% of the Company's outstanding voting securities, and thereby becomes the
largest shareholder and owns more shares than Bernard L. Weiss, Julie Heldman,
Robert Fried, Robert Zeichick, Michael Prince and Daniel Warren (all of whom
are currently directors and/or officers of the Company), or (ii) the Company
commits a material breach of the license agreement.
Hart Schaffner & Marx Eyewear
The Hart Schaffner & Marx Eyewear collection is targeted at men who are
somewhat conservative and interested in quality, comfort and craftsmanship.
Hart Schaffner & Marx, a subsidiary of Hartmarx Corporation and a leading
manufacturer of tailored clothing, has an image of enduring quality, and is a
recognized name among men who purchase apparel in the medium to high price
range. Because men are generally concerned about both function and fashion,
the frames contain features which enhance their durability--the highest
quality screws, nosepads and spring hinges--and come with a warranty. The
collection is designed to fit a broad spectrum of men, and selected styles
have longer temples and larger sizes than those generally available.
The Company has the exclusive right to market and sell Hart Schaffner &
Marx Eyewear in the United States through a license with Hart Schaffner & Marx
entered into in January 1996. The license agreement gives the Company the
right of first refusal to sell Hart Schaffner & Marx in any additional
countries. The Hart Schaffner & Marx license was renewed in April 1999, and
may be renewed for three-year terms by the Company in perpetuity provided the
Company is not in default under the license agreement. Hart Schaffner & Marx
may terminate its license with the Company before the expiration of its term
if (i) someone other than Bernard Weiss, Julie Heldman, Robert Fried or Robert
Zeichick acquires more than 50% of the Company's outstanding voting
securities, or (ii) the Company fails to perform its material obligations
under the license agreement.
Nicole Miller Eyewear
In June 1999, in connection with the CDS Acquisition, the Company acquired
the exclusive license to design and market Nicole Miller Eyewear, a collection
of women's and men's prescription eyewear frames and sunwear. California
Design Studio had held the Nicole Miller Eyewear license since 1993, and had
marketed the line in the United States and in over 20 countries
internationally. Nicole Miller, which has 21 retail stores in the United
States, Japan and China, was founded in 1920. From the previous collection of
Nicole Miller Eyewear, the Company retained approximately 35 styles, and
expects to release approximately 24 more Nicole Miller Eyewear styles during
fiscal 2000.
Nicole Miller Eyewear is targeted at the sophisticated, style-conscious
modern woman who creates her own fashion trends in a fun, whimsical way.
Nicole Miller clothing designs feature colorful designs with interesting
shapes, without being pretentitious or extreme. The Nicole Miller Eyewear
collection also features colorful designs with interesting shapes, that
represent youthful energy and sophistication. Most styles of Nicole Miller
Eyewear prescription eyewear frames are available either as prescription
eyewear or as sunwear, and many are available with lenses in designer colors.
The license for Nicole Miller Eyewear expires in March 2003. The licensor
may terminate the license before its stated term expires if the Company
materially breaches the license agreement.
9
<PAGE>
COACH Eyewear
In March 1999, the Company entered into a license with COACH, a wholly
owned subsidiary of Sara Lee Corporation, for COACH Eyewear. The COACH name
had not previously been licensed for prescription eyewear or sunwear. COACH is
best known for its high-quality leather products, including handbags and
luggage. COACH currently has over 165 retail stores worldwide, as well as
numerous "shop within shops" inside department stores.
The Company expects to introduce the COACH Eyewear Collection in the spring
of 2000. Coach Eyewear will have both prescription eyewear and sunwear, and
will combine both design and function with classically modern styling, for
today's discerning consumer. The result is distinctive simplicity with a sense
of refinement. In addition, all Coach frames will be sold as an ensemble with
an authentic Coach leather eyeglass case, clearly associating the collection
with Coach's trademark craftsmanship.
The Company has the exclusive right to market and sell COACH Eyewear in the
United States and Canada pursuant to a license agreement entered into in March
1999 with COACH. The license expires ten years after COACH Eyewear is
introduced (currently scheduled for the spring of 2000). COACH may terminate
the license before its stated term expires if the Company materially breaches
the license agreement or a designated competitor of COACH acquires 50% or more
of the outstanding common stock of the Company. The Company and COACH may each
terminate the license if net sales of COACH Eyewear in a particular year are
less than 50% of targeted net sales. In addition to a royalty based on net
sales, the Company has agreed to issue to COACH, upon the introduction of
COACH Eyewear, three-year warrants to purchase 50,000 shares of common stock
of the Company at an exercise price of $6.50 per share and five-year warrants
to purchase an additional 50,000 shares of common stock of the Company at an
exercise price of $9.50 per share.
bebe eyes
The Company entered into a license with bebe stores, inc. in September
1999, and the resulting collection will be named "bebe eyes." Signature
pursued the license for its widespread name recognition and its popularity
among young women. bebe stores, inc., which currently has over 100 retail
stores in U.S. malls, is a public company.
bebe clothing is well known for its sexy, provocative styling. Like the
clothing, bebe eyes will feature hip, flirtatious styling for the
discriminating bebe customer. bebe eyes will also offer sunwear, which is
designed for women who take pride in their appearance, while seeking quality
and contemporary fashion at a competitive price.
The Company has the exclusive right to market and sell bebe eyes in the
United States, Canada and a number of other countries pursuant to a license
agreement the Company entered into in September 1999 with bebe stores, inc.
The license expires in March 2003. The Company may renew the license for two
consecutive three-year terms provided it meets certain minimum net sales and
royalty requirements during the preceding term. bebe may terminate the license
before its stated term expires under certain circumstances, including if the
Company materially breaches the license agreement or if, without the prior
approval of bebe, 50% or more or the outstanding common stock of the Company
is acquired by either: (A) a women's apparel company or (B) another person and
the financial and operational condition of the Company is impaired or such
other person makes or proposes to make material changes in the key management
personnel in charge of the license.
House Brands
The cost to retailers of frames in Signature's own lines will generally be
less than frames with brand names, because the latter command greater retail
prices, and there are no licensing fees payable on the Company's own lines.
Moreover, the styling of Signature's own lines can be more flexible, because
the Company will be able to change the styling--as well as its merchandising--
more rapidly without the often time-consuming requirement of submitting them
to the licensor for its approval.
10
<PAGE>
Dakota Smith Eyewear
Signature obtained its proprietary Dakota Smith brand in connection with
the CDS Acquisition. The Dakota Smith Eyewear line was introduced by
California Design Studio, Inc. in 1992, and in fiscal 1999 was sold both in
the United States and in over 20 other countries. Historically, the
collection's frame styling and merchandising have primarily had a Western
theme. Signature intends to broaden the appeal of Dakota Smith Eyewear, so
that it captures the diversity and mystique of the American lifestyle.
Spirited, original designs will be targeted at both men and women, and capture
the American way of life.
Camelot Collection
The Company first introduced its own styles for manufacture overseas in
1986. Those styles became the Camelot collection, which contains a broad range
of high-quality men's, women's, unisex, girls' and boys' styles. To date, the
Company has sold the Camelot collection primarily through USA Optical, which
is now a division of Signature. The Company does not anticipate growth in the
sales of the USA Optical division in the near future, as the Company has been
focusing its energies on selling its brand-name collections of prescription
frames and sunwear.
Signature Collections
The Company established its own line, Signature Collections, in fiscal
1999. The line will comprise multiple segments, each targeting niches not
otherwise filled by the Company's brand-name collections. The Company's goals
related to that line are: to position Signature to compete more effectively
against other optical companies that have direct sales forces; to enable the
Company to offer products in segments not served by the Company's licensed
collections; and to allow the Company to develop products more quickly; and to
reach different markets by offering good quality, low-cost styles.
The Company in fiscal 1999 launched four segments of the Signature
Collections, and expects to launch three more segments in fiscal 2000.
Brand Name Close-Outs
Another Signature division, Optical Surplus, sells brand-name close-outs
(discontinued styles) at discounted prices. Optical Surplus has also served as
a useful outlet for selling overstocks of the Company's own brand-name
products and its own Camelot collection. Using Optical Surplus, the Company is
able to control the distribution of its overstocks without disturbing the
market.
Distribution
The Company distributes its products (1) to independent optical retailers
in the United States, primarily through its national direct sales force, (2)
internationally, primarily through exclusive distributors in foreign
countries; (3) to major optical retail chains, including EyeCare Centers of
America, Pearle Vision, LensCrafters and U.S. Vision, through its own account
managers; and (4) through telemarketing (USA Optical and Optical Surplus).
11
<PAGE>
The following table sets forth the Company's net sales by distribution
channel for the periods indicated:
<TABLE>
<CAPTION>
Year Ended October 31,
-----------------------
1997 1998 1999
------- ------- -------
(In Thousands)
<S> <C> <C> <C>
Domestic distributors............................... $14,402 $17,504 $12,281
Optical retail chains............................... 9,297 11,252 15,709
Telemarketing(1).................................... 4,871 5,592 4,863
International distributors.......................... 2,540 3,473 3,822
Direct sales(2)..................................... 2,066 3,071 7,389
------- ------- -------
$33,176 $40,892 $44,064
======= ======= =======
</TABLE>
- --------
(1) USA Optical and Optical Surplus.
(2) The Company began selling directly to independent optical retailers
nationally in October 1999.
Domestic Distributors. Before October 1, 1999, the Company distributed its
products to independent optical retailers in the United States primarily
through a network of 24 exclusive distributors. As a result of its decision to
distribute its products to independent optical retailers in the United States
through its national direct sales force effective October 1, 1999, the Company
terminated all but two of these distributors in the fourth quarter of fiscal
1999.
Direct Sales. For the past several years the Company sold to independent
optical retailers through its own direct sales force only in California and
Arizona. As a result of its decision to distribute through a national direct
sales force effective October 1, 1999, the Company added sales representatives
commencing the fourth quarter of fiscal 1999. The direct sales force numbered
92 at December 31, 1999, with a target of 130 sales representatives by the end
of fiscal 2000.
Optical Retail Chains. Signature sells directly, through its own key
account managers, to optical retail chains whose images are compatible with
the images of the Company's brand-name eyewear, including EyeCare Centers of
America, Pearle Vision, LensCrafters and U.S. Vision. EyeCare Centers of
America and Pearle Vision each use in-store displays customized by the Company
to feature its products, and have dedicated prime floor space to both Laura
Ashley Eyewear and Eddie Bauer Eyewear.
Telemarketing. The Company's USA Optical and Optical Surplus divisions sell
frames through a form of telemarketing to optical retailers, focusing on
establishing long-term, ongoing relationships. USA Optical offers its
customers premium incentives, such as first class vacations, electronic
equipment and household items for purchasing specified numbers of frames. Many
USA Optical customers buy frames from the Company on a monthly basis in order
to earn the premiums they have chosen to pursue. USA Optical's annual
vacations have been among its most successful premiums, and since 1991 over
300 USA Optical customers have attended one or more of its trips.
International Distributors. The Company sells certain of its products
internationally through exclusive distributors and since June 1999 in Western
Europe through 12 independent sales representatives obtained in connection
with the CDS Acquisition. The Company's international distributors have
exclusive agreements for defined territories. At December 31, 1999, the
Company had 27 international distributors. Historically, the large majority of
Signature's international sales through distributors have been of Laura Ashley
Eyewear sold in England, Canada and Australia. The Company began selling Eddie
Bauer Eyewear to three international distributors in its third quarter of
fiscal 1998 and in fiscal 1999 to a Japanese distributor that also
manufactures some of the styles.
12
<PAGE>
Contract Manufacturing
The Company's frames are manufactured to its specifications by a number of
contract manufacturers located outside the United States. The manufacture of
high quality metal frames is a labor-intensive process which can require over
200 production steps (including a large number of quality-control procedures)
and from 90 to 180 days of production time. In fiscal 1999, Signature used
manufacturers principally in Japan, Hong Kong/China, Italy and France, which
accounted for 37.3%, 35.2%, 11.8% and 3.5%, respectively, (in cost) of the
frames purchased by the Company. The Company believes that throughout the
world there are a sufficient number of manufacturers of high-quality frames so
that the loss of any particular frame manufacturer, or the inability to import
frames from a particular country, would not materially and adversely affect
the Company's business in the long-term. However, because lead times to
manufacture the Company's eyeglass frames generally range from 90 to 180 days,
an interruption occurring at one manufacturing site that requires the Company
to change to a different manufacturer could cause significant delays in the
distribution of the styles affected. This could cause the Company not to meet
delivery schedules for these styles, which could materially and adversely
affect the Company's business, operating results and financial condition.
In determining which manufacturer to use for a particular style, the
Company considers manufacturers' expertise (based on type of material and
style of frame), their ability to translate design concepts into prototypes,
their price per frame, their manufacturing capacity, their ability to deliver
on schedule, and their ability to adhere to the Company's quality control and
quality assurance requirements.
The Company is not required to pay for any of its frames prior to shipment.
Payment terms for the Company's products currently range from cash upon
shipment (with a 1% to 3% discount) to terms ranging between 60 and 90 days on
open account. For frames imported other than from Hong Kong manufacturers, the
Company is obligated to pay in the currency of the country in which the
manufacturer is located. In the case of frames purchased from manufacturers
located in Hong Kong/China, the currency is United States dollars. For almost
all of the Company's other frame purchases, its costs vary based on currency
fluctuations, and it generally cannot recover increased frame costs (in United
States dollars) in the selling price of the frames.
The purchase of goods manufactured in foreign countries is subject to a
number of risks. See "Management's Discussion and Analysis of Result of
Operations and Financial Condition--Factors That May Affect Future Results--
Dependence Upon Contract Manufacturers; Foreign Trade Regulation."
Competition
The markets for prescription eyewear are intensely competitive. There are
thousands of frame styles, including hundreds with brand names. At retail, the
Company's eyewear styles compete with styles that do and do not have brand
names, styles in the same price range, and styles with similar design
concepts. To obtain board space at an optical retailer, the Company competes
against many companies, both foreign and domestic, including Luxottica Group
S.p.A.; Safilo Group S.p.A.; and Marchon Eyewear, Inc., as well as Signature's
former distributors. Signature's largest competitors have significantly
greater financial, technical, sales, manufacturing and other resources than
the Company. They also employ direct sales forces that have existed for
longer, and are significantly larger than the Company's. At the major retail
chains, the Company competes not only against other eyewear suppliers, but
also against the chains themselves, which license some of their own brand
names for design, manufacture and sale in their own stores. Luxottica, one of
the largest eyewear companies in the world, is vertically integrated, in that
it manufactures frames, distributes them through direct sales forces in the
United States and throughout the world, and owns LensCrafters, one of the
largest United States retail optical chains.
The Company competes in its target markets through the quality of the brand
names it licenses, its marketing and merchandising, the popularity of its
frame designs, the reputation of its styles for quality, and its pricing
policies. See "Brand Development" and "Products."
13
<PAGE>
Backlog
The Company generally ships eyeglass frames upon receipt of orders, and
does not operate with a material backlog.
Employees
At October 31, 1998, the Company had 130 full-time employees, including 52
in sales and marketing, 15 in customer service and support, 35 in warehouse
operations and shipping and 28 in general administration and finance. At
October 31, 1999, the Company had 239 full-time employees, including 109 in
sales and marketing, 31 in customer service and support, 51 in warehouse
operations and shipping, and 48 in general administration and finance. The
increase in the number of the Company's employees is largely due to its
decision to sell directly to optical retailers throughout the United States,
and increase in the Company's infrastructure to support the direct sales. None
of the Company's employees is covered by a collective bargaining agreement.
The Company considers its relationship with its employees to be good.
Item 2--Description of Properties
The Company leases approximately 64,000 square feet of a building located
in Inglewood, California, where it maintains its principal offices and a
warehouse. The Company's lease for this facility expires in 2005, although the
Company has an option to renew the lease for an additional five years.
The Company's international division also leases approximately 2,500 square
feet of a building in Liege, Belgium, which supports the Company's sales in
Europe.
Item 3--Legal Proceedings
The Company is not involved in any material legal proceedings.
Item 4--Submission of Matters to a Vote of Securityholders
None.
14
<PAGE>
PART II
Item 5--Market for Registrant's Common Equity and Related Stockholder Matters
Common Stock
The Company's Common Stock is traded on the Nasdaq National Market System
under the symbol "SEYE." The following table sets forth, for the period
indicated, certain high and low prices for the Common Stock as reported by the
Nasdaq Stock Market.
<TABLE>
<CAPTION>
High Low
------ -----
<S> <C> <C>
Fiscal Year Ended October 31, 1998
First Quarter................................................ $ 9.13 $6.75
Second Quarter............................................... $10.38 $7.88
Third Quarter................................................ $ 9.50 $7.00
Fourth Quarter............................................... $ 7.50 $3.13
</TABLE>
<TABLE>
<S> <C> <C>
Fiscal Year Ended October 31, 1999
First Quarter................................................. $5.69 $3.38
Second Quarter................................................ $4.72 $2.75
Third Quarter................................................. $4.41 $2.88
Fourth Quarter................................................ $4.19 $3.13
</TABLE>
On January 21, 2000, the last sales price of the Common Stock as reported
on the Nasdaq Stock Market was $2.75 per share. As of January 21, 2000, there
were 25 holders of record of the Common Stock.
Recent Sales of Unregistered Securities
In September 1999, the Company issued to Springer Capital Corporation
50,000 shares of the Company's Common Stock and Warrants to purchase up to
50,000 shares of the Company's Common Stock at an exercise price of $7.50 per
share. The Warrants currently are exercisable in full and terminate on
September 10, 2004. The Company issued these securities in connection with the
Company's acquisition from Springer Capital Corporation of all the issued and
outstanding capital stock of Great Western Optical. The Company issued these
securities in reliance on Section 4(2) of the Securities Act of 1933, as
amended, as a transaction not involving public offering.
Dividends
The Company does not currently intend to pay dividends on its Common Stock
and plans to follow a policy of retaining earnings to finance the growth of
its business. The Company paid no dividends in fiscal 1999.
15
<PAGE>
Item 6--Selected Financial Data
The following data should be read in conjunction with the Consolidated
Financial Statements and related notes and with "Management's Discussion and
Analysis of Results of Operations and Financial Condition" appearing elsewhere
in this Form 10-K.
<TABLE>
<CAPTION>
Year Ended October 31,
-----------------------------------------------------
1995 1996 1997 1998 1999
------- --------- --------- --------- ---------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement Of Income
Data:
Net sales............... $23,571 $ 28,280 $ 33,176 $ 40,892 $ 44,064
Gross profit............ 12,532 16,249 19,333 23,247 25,317
Total operating
expenses............... 10,730 13,927(1) 15,323 19,041 27,470
Income from operations.. 1,802 2,322 4,010 4,206 (2,153)
Net income (loss)....... 1,635 2,012 3,585 2,750 (1,309)
Net income (loss) per
share.................. 0.52 (0.26)
Pro forma net income
(2).................... 1,030 1,265 2,340
Pro forma net income per
share.................. 0.36(2) 0.61(2)
Weighted average common
shares outstanding..... 3,546,519(3) 3,829,822 5,254,156 5,095,259
<CAPTION>
1995 1996 1997 1998 1999
------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance sheet data:
Current assets.......... $ 6,462 $ 8,989 $ 19,964 $ 23,548 $ 27,474
Total assets............ 7,260 10,293 21,175 25,151 35,474
Current liabilities..... 4,602 7,207 3,860 5,498 12,334
Total liabilities....... 5,314 7,364 3,863 5,736 17,471
Stockholders' equity.... 1,946 2,929 17,312 19,415 18,003
</TABLE>
- --------
(1) Includes $300,000 in compensation expense recognized by the Company in
connection with the issuance of 108,016 shares of Common Stock to an
executive officer.
(2) The pro forma presentation reflects a provision for income taxes as if
the Company had always been a C corporation.
(3) Pro forma.
Item 7--Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis, which should be read in connection
with the Company's Consolidated Financial Statements and accompanying
footnotes, contain forward-looking statements that involve risks and
uncertainties. Important factors that could cause actual results to differ
materially from the Company's expectations are set forth in "Factors That May
Affect Future Results" in this Item 7 of this Form 10-K, as well as those
discussed elsewhere in this Form 10-K. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on
its behalf are expressly qualified in their entirety by "Factors That May
Affect Future Results." Those forward-looking statements relate to, among
other things, the Company's plans and strategies, new product lines, and
relationships with licensors, distributors and customers, distribution
strategies and the business environment in which the Company operates.
The following discussion and analysis should be read in connection with the
Company's Financial Statements and related notes and other financial
information included elsewhere in this Form 10-K.
Overview
The Company derives revenues primarily through the sale of eyeglass frames
under brand names pursuant to exclusive licenses (including Laura Ashley
Eyewear, Eddie Bauer Eyewear, Hart Schaffner & Marx Eyewear, and Nicole Miller
Eyewear) and which the Company owns, including Dakota Smith Eyewear.
16
<PAGE>
The Company's best-selling product lines are Laura Ashley Eyewear and Eddie
Bauer Eyewear. Its most successful line is Laura Ashley Eyewear, which was
launched in 1992. Net sales of Laura Ashley Eyewear and Eddie Bauer Eyewear
together accounted for 77% and 75% of the Company's net sales in fiscal 1998
and fiscal 1999, respectively. Although the Company expects the Laura Ashley
Eyewear and Eddie Bauer lines to continue to be the Company's leading sources
of revenue for the near future, the Company expects to reduce its dependence
on these two lines through sales of an expanding product line, including
eyewear under brand-name licenses for COACH Eyewear, Eddie Bauer Performance
Sunwear featuring Oakley's patented lens technology, and bebe eyes, and more
proprietary brands.
The Company's cost of sales consists primarily of payments to foreign
contract manufacturers that produce frames to the Company's specifications.
The complete development cycle for a new frame design typically takes
approximately twelve months from the initial design concept to the release.
Generally, at least six months are required to complete the initial
manufacturing process.
Before October 1, 1999, the Company distributed its products to independent
optical retailers in the United States primarily through exclusive
distributors. During the nine months ended July 31, 1999, sales through United
States distributors accounted for approximately 37% of the Company's total net
sales. Effective as of October 1, 1999, the Company terminated all but two of
its 24 United States distributors and hired its own national direct sales
force, which numbered 92 sales representatives at December 31, 1999 (with a
target of 130 sales representatives by the end fiscal 2000). The Company made
this conversion to stimulate sales growth by enabling the Company to work more
closely with sales representatives who are dedicated to selling only the
Company's products, and to require its sales representatives to implement the
Company's marketing plans.
The Company's conversion to a direct sales force in the United States has
had several material impacts on the Company. The Company incurred significant
expenditures in connection with the conversion, including the employment of
additional sales executives, sales representatives, customer service and
distribution personnel and other support personnel, in computer hardware and
software, telephone and warehouse distribution infrastructure. In addition,
following the announcement in August 1999 of the conversion, distributors
significantly reduced their selling efforts and returned inventory.
Distributors inventory returns increased from $2.8 million in fiscal 1998 to
$6.8 million in fiscal 1999, and the Company's gross sales (sales before
returns) to domestic distributors decreased from $20.3 million in fiscal 1998
to $19.1 million in fiscal 1999.
In June 1999, the Company acquired substantially all of the assets of
California Design Studio, Inc., a designer and marketer of prescription
eyeglass frames and ready-to-wear sunglasses. Total consideration for the
assets was approximately $7.4 million, which consists of: (i) $1.4 million in
cash; (ii) a promissory note in the principal amount of $1.25 million payable
in monthly installments of $17,042 maturing in 2002; (iii) other deferred
payments of approximately $500,000; and (iv) the assumption of approximately
$4.7 million of liabilities, including primarily an obligation of $4.1 million
discounted to present value to California Design Studio's principal eyeglass
frame manufacturer, which is payable in monthly installments over a three year
period. The assets acquired primarily consisted of a license to sell frames
under the Nicole Miller brand name, proprietary brand names Dakota Smith, Koko
and Nukes, inventory, machinery, furniture, equipment and accounts receivable.
California Design Studio's consolidated revenues for its fiscal year ended
April 30, 1999 were $8.6 million, and its total assets at April 30, 1999 were
approximately $4.6 million. The acquisition was accounted for as a purchase.
Effect of Change in Form from an S Corporation to a C Corporation
The Company was treated as an S Corporation from 1990 through September 15,
1997. During the period the Company was an S Corporation, its income, whether
or not distributed, was taxed for federal and state income tax purposes
directly to the holders of the Common Stock, rather than to the Company. In
addition, for California franchise tax purposes, S Corporations were taxed at
1.5% of taxable income.
17
<PAGE>
The Company paid dividends to its shareholders of $1.3 million and $4.0
million in fiscal 1996, and fiscal 1997, respectively. These dividends were
paid to the shareholders to pay their income taxes and as a return of their
investment. No dividends were paid in fiscal 1998 or fiscal 1999.
Since September 16, 1997, the Company has been a C Corporation, subject to
federal and state corporate income taxes. As a result of this conversion, the
Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." See Note 1 of Notes to Consolidated Financial
Statements. Currently, the highest federal tax rate for C Corporations is 39%
(although the majority of the taxable income is taxed at 34%) and the
corporate tax rate in California is 8.84%. The pro forma provision for income
taxes in the statement of operations data included elsewhere in this Form 10-K
shows results as if the Company had always been a C Corporation.
Financial Accounting Standards No. 109 requires the use of the "liability
method" of accounting for income taxes. Under that method, deferred income tax
assets and liabilities are recognized for the expected future tax consequences
of events that have been included in a company's financial statements or tax
returns. At October 31, 1999, the Company recorded deferred income tax assets
of $392,000, resulting primarily from temporary differences arising from
capitalization of inventory costs of $279,000 and allowance for doubtful
accounts of $90,000. See Note 7 of Notes to Consolidated Financial Statements.
Results of Operations
The following table sets forth for the periods indicated selected
statements of operations data shown as a percentage of net sales. Pro forma
operating results reflect adjustments to the historical operating results for
federal and state income taxes as if the Company had been taxed as a C
Corporation rather than an S Corporation.
<TABLE>
<CAPTION>
Year Ended
October 31,
-------------------
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Net sales............................................ 100.0% 100.0% 100.0%
Cost of sales........................................ 41.7 43.1 42.5
----- ----- -----
Gross profit......................................... 58.3 56.9 57.5
----- ----- -----
Operating expenses:
Selling............................................ 28.5 29.4 31.5
General and administrative......................... 17.7 17.2 24.8
Restructuring cost................................. 0.0 0.0 6.0
----- ----- -----
Total operating expenses......................... 46.2 46.6 62.3
----- ----- -----
Income (loss) from operations........................ 12.1 10.3 (4.8)
----- ----- -----
Other income (expense), net.......................... (0.9) 0.9 0.1
----- ----- -----
Income (loss) before provision (benefit) for income
taxes............................................... 11.2 11.2 (4.7)
Provision (benefit) for income taxes................. 4.5 (1.7)
Pro forma provision for income taxes................. 3.9
----- ----- -----
Net income (loss).................................... 6.7% (3.0)%
===== =====
Pro forma net income................................. 7.3%
=====
</TABLE>
18
<PAGE>
Comparison of Fiscal Years 1997, 1998 and 1999
Net Sales. Net sales increased by 23.3% from $33.2 million in fiscal 1997
to $40.9 million in fiscal 1998, and by 7.8% to $44.1 million in fiscal 1999.
The following table shows certain information regarding net sales for the
periods indicated:
<TABLE>
<CAPTION>
Year End October 31,
-----------------------
1997 1998 1999
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Laura Ashley Eyewear................................. $24,129 $22,902 $19,021
Eddie Bauer Eyewear.................................. -- 8,532 14,100
Other................................................ 9,047 9,458 10,943
------- ------- -------
$33,176 $40,892 $44,064
======= ======= =======
</TABLE>
Net sales in fiscal 1999 were adversely affected by the Company's
termination of 22 of its domestic distributors announced at the beginning of
the fourth quarter, which resulted in materially decreased selling efforts by
the distributors during the period the Company was starting up its direct
sales force. The decrease in Laura Ashley Eyewear net sales from fiscal 1997
to fiscal 1998 was due to a decrease in the average price per frame and to a
lesser extent to a decrease in units sold. The decrease in Laura Ashley
Eyewear net selling sales from fiscal 1998 to fiscal 1999 was due principally
to a decrease in units sold and to distributor frame returns (aggregating $2.3
million). The increase in net sales of Eddie Bauer Eyewear in fiscal 1999 was
due to in large part to the fact that the line was launched in March 1998, and
thus was sold for only eight months in fiscal 1998, and to consumer acceptance
of the line, offset in part by distributor frame returns. The increase in
other net sales from fiscal 1998 to fiscal 1999 was due in part to the
addition of the Dakota Smith Eyewear and Nicole Miller Eyewear lines resulting
from the CDS Acquisition in June 1999.
Gross Profit. Gross profit was $19.3 million in fiscal 1997, $24.2 million
in fiscal 1998 and $25.3 million in fiscal 1999. These increases in gross
profit were attributable to increases in net sales. The decrease in the gross
margin from fiscal 1997 to fiscal 1998 was due primarily to the Company's
decision to include at no charge cases with a greater percentage of its frames
sold through distributors, resulting in an increase in cost of goods sold,
which more than offset favorable currency fluctuations. The increase in gross
margin in fiscal 1999 was due to an increase in direct sales as a percentage
of total net sales, which offset unfavorable currency fluctuations. Gross
margins in all three fiscal years were aided by continuing reductions in
import duties and tariffs.
Selling Expenses. Selling expenses were $9.5 million in fiscal 1997, $12.0
million in fiscal 1998 and $13.9 million in fiscal 1999. The 26.8% increase
from fiscal 1997 to fiscal 1998 resulted primarily from expenditures a
$914,000 increase in promotional expenses, due primarily to the introduction
of the Eddie Bauer Eyewear line for in-store displays amounting to $444,000;
and an increase in royalty expenses of $727,000. The 15.7% increase from
fiscal 1998 to fiscal 1999 resulted primarily from an increase of $1.7 million
in compensation expense relating to additional sales representatives and
warehouse personnel hired during fiscal 1999 in connection with the CDS
Acquisition and the Company's decision to sell to independent optical
retailers in the United States through a national direct sales force.
General and administrative expenses. General and administrative expenses
were $5.9 million in fiscal 1997, $7.0 million in fiscal 1998, and $10.9 in
fiscal 1999. The 20% increase from fiscal 1997 to fiscal 1998 resulted in
large part from a $571,000 increase in salaries and employee bonuses, due
mostly to new employees hired during fiscal 1998 to accommodate the Company's
growth and continuing investment in its infrastructure. The 55.7% increase
from fiscal 1998 to fiscal 1999 resulted in large part from an increase of
$1.1 million in compensation expense and related employee benefits for middle
management and other administrative personnel hired during fiscal 1999 in
connection with the Company's decision to sell to independent optical
retailers in the United States through a national direct sales force, and
$512,000 in computer systems and warehouse upgrades.
19
<PAGE>
Restructuring Costs. The Company recognized $2.6 million in nonrecurring
restructuring costs in fiscal 1999 relating primarily to the gross profit
previously recognized on sales of $4.4 million of products returned by the
Company's United States distributors following their termination in the fourth
quarter of 1999.
Other Income (Expense), Net. Other expense, net, in fiscal 1997 was
$296,000, which consisted principally of interest expense. Other income, net,
in fiscal 1998 was $403,000, due to the Company's repayment of its bank
financing in the fourth quarter of fiscal 1997 with the net proceeds of its
September 1997 initial public offering, and the interest income resulting from
the Company investing a portion of those proceeds.
Provision (Benefit) for Income Taxes. On a pro forma basis, income taxes
(unaudited) would have amounted to $1.3 million in fiscal 1997. Income taxes
were $1.9 million in fiscal 1998, and the Company had an income tax benefit of
($0.8 million) in fiscal 1999.
Net Income(Loss). Pro forma net income (unaudited) was $2,340,000 in fiscal
1997. The Company had net income in fiscal 1998 of $2,750,000, and a net loss
in fiscal 1999 of $1.3 million.
Liquidity and Capital Resources
At October 31, 1999, the Company had $0.4 million in cash or cash
equivalents, of which $254,000 was invested in commercial paper and a
certificate of deposit with interest rates ranging from 4.14% to 4.15%.
The Company's inventories increased from $11.3 million at October 31, 1998
to $16.6 million at October 31, 1999. This increase was due principally to
inventory returns from terminated United States distributors and to a lesser
extent to inventory acquired in the CDS Acquisition.
The Company had goodwill of $6.0 million at October 31, 1999 resulting
primarily from the CDS Acquisition and to a lesser extent the acquisition of
Great Western Optical, one of the Company's distributors, in August 1999. See
Note 2 of Notes to Consolidated Financial Statements.
In October 1997, the Company entered into a credit agreement with its
commercial bank (the "Credit Agreement"). As of October 31, 1999, under the
Credit Agreement, the bank had agreed to provide to the Company a secured
revolving line of credit up to an aggregate of $5,000,000. At the Company's
option, interest may be based on the London Interbank Offered Rate ("LIBOR")
plus 2% or at the bank's prime rate. At October 31, 1999, $1,500,000 was due
to the bank under the Credit Agreement.
Long-term debt at October 31, 1999 included a $1.2 million note payable to
California Design Studio, Inc. and an obligation to a frame vendor of
California Design Studio, Inc. (present value of $3.6 million) assumed in
connection with the CDS Acquisition. See Note 6 of Notes to Consolidated
Financial Statements.
Of the Company's accounts payable at October 31, 1998 and October 31, 1999,
$2.2 million and $1.5 million, respectively, were payable in foreign currency.
To monitor risks associated with currency fluctuations, the Company on a
weekly basis assesses the volatility of certain foreign currencies and reviews
the amounts and expected payment dates of its purchase orders and accounts
payable in those currencies. Based on those factors, the Company may from time
to time mitigate some portion of that risk by purchasing forward commitments
to deliver foreign currency to the Company. The Company held forward
commitments for foreign currencies in the amount of $56,000 at October 31,
1999. See Note 1 of Notes to Consolidated Financial Statements.
The Company's bad debt write-offs were less than 0.2% of net sales for the
1997, 1998 and 1999 fiscal years. As part of the Company's management of its
working capital, the Company performs most customer credit functions
internally, including extensions of credit and collections.
As of October 31, 1999, the Company had repurchased on the open market
235,638 shares of its Common Stock at a cost of $1,000,595 under a stock
buyback program initiated in September 1998. The program allows
20
<PAGE>
the Company to repurchase up to $1.5 million of its Common Stock from time to
time on the open market at prevailing prices.
After the end of fiscal 1999, the Company experienced a substantial
reduction in working capital resulting primarily from inventory returns from
terminated United States distributors, other inventory overstocks resulting
from the distributors' decreased sales efforts in the Company's fiscal fourth
quarter, and investments in the Company's infrastructure. To provide for
additional liquidity, in December 1999, the Company and the bank amended the
Credit Agreement to extend the term loan period to 48 months and increase the
term loan commitment to $3,800,000. The term loan bears interest at an annual
rate of 8.52% until December 31, 2001 and thereafter at LIBOR plus 2.5%.
As of January 31, 2000, the Company had cash of $463,000, as well as
$700,000 remaining in its credit facility. Based on projected sales volumes
and related cash flows, and its current balance sheet, the Company believes it
will have adequate liquidity through at least its second fiscal quarter. The
Company plans to launch Coach Eyewear, Eddie Bauer Performance Sunwear and
bebe eyes in the Spring of 2000. Because of the costs of these launches, and
the possibility that sales volumes and cash flows could be less than
projected, the Company is currently in discussions with its bank to increase
its credit facility. Based on these discussions, the Company believes that the
bank will agree to an increase, although the bank has made no commitment as of
this date. If the Company is unable to increase this credit facility, the
Company intends to seek alternative sources of financing.
Quarterly and Seasonal Fluctuations
The Company's results of operations have fluctuated from quarter to quarter
and the Company expects these fluctuations to continue in the future.
Historically, the Company's net sales in its first fiscal quarter (the quarter
ending January 31) have been lower than net sales in other fiscal quarters.
The Company attributes lower net sales in the first fiscal quarter in part to
low consumer demand for prescription eyeglasses during the holiday season and
year-end inventory adjustments by distributors and independent optical
retailers. A factor which may significantly influence results of operations in
a particular quarter is the introduction of a new brand-name collection, which
results in disproportionate levels of selling expenses due to additional
advertising, promotions, catalogs and in-store displays. Introduction of a new
brand may also generate a temporary increase in sales due to initial stocking
by retailers.
Other factors which can influence the Company's results of operations
include customer demand, the mix of distribution channels through which the
eyeglass frames are sold, the mix of eyeglass frames sold, product returns,
delays in shipment and general economic conditions.
21
<PAGE>
The following table sets forth certain unaudited results of operations for
the twelve fiscal quarters ended October 31, 1999. The unaudited information
has been prepared on the same basis as the audited financial statements
appearing elsewhere in this Form 10-K and includes all normal recurring
adjustments which management considers necessary for a fair presentation of
the financial data shown. The operating results for any quarter are not
necessarily indicative of future period results.
<TABLE>
<CAPTION>
1997 1998
---------------------------------- --------------------------------
JAN. 31 APRIL 30 JULY 31 OCT. 31 JAN. 31 APRIL 30 JULY 31 OCT. 31
------- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............... $6,802 $9,236 $8,318 $8,820 $6,722 $12,173 $10,704 $11,292
Cost of sales........... 2,964 3,817 3,451 3,610 2,900 5,196 4,552 4,996
Gross profit............ 3,838 5,419 4,867 5,210 3,822 6,977 6.152 6,296
Operating expenses:
Selling............... 1,939 2,613 2,322 2,580 1,771 3,491 3,270 3,477
General and
administrative....... 1,364 1,443 1,540 1,523 1,511 1,773 1,866 1,884
Total operating
expenses............... 3,303 4,056 3,862 4,103 3,282 5,264 5,136 5,361
Income from operations.. 535 1,363 1,005 1,107 540 1,713 1,016 935
Other income (expense),
net.................... (85) (106) (104) (1) 114 103 70 116
Income before pro forma
provision for income
taxes.................. 450 1,257 901 1,106 654 1,816 1,086 1,051
</TABLE>
<TABLE>
<CAPTION>
1999
--------------------------------
JAN. 31 APRIL 30 JULY 31 OCT. 31
------- -------- ------- -------
<S> <C> <C> <C> <C>
Net sales..................................... 9,036 12,426 13,228 9,374
Cost of sales................................. 4,216 5,300 5,787 3,444
Gross profit.................................. 4,820 7,126 7,441 5,930
Operating expenses:
Selling..................................... 2,885 3,646 3,461 3,895
General and administrative.................. 1,915 2,292 3,020 3,722
Restructuring cost............................ 0 0 0 2,634
Total operating expenses...................... 4,800 5,938 6,481 10,251
Income (loss) from operations................. 20 1,188 960 (4,321)
Other expense, net............................ 42 31 18 (31)
Income (loss) before pro forma
provision for income taxes................... 62 1,219 978 (4,352)
</TABLE>
Inflation
The Company does not believe its business and operations have been
materially affected by inflation.
Year 2000
The Company has not experienced any difficulties resulting from the Year
2000 problem, which is the processing of date-sensitive information by the
information technology systems used by the Company and its key customers and
vendors. The Year 2000 problem is the result of computer programs being
written using two digits to define the applicable yea, which could result in
computer programs recognizing a date using "00" as the year 1900 rather than
2000, thereby causing miscalculations or system failures. The Company does not
currently anticipate any future Year 2000 problems.
22
<PAGE>
Factors That May Affect Future Results
The following is a discussion of certain factors that may affect the
Company's financial condition and results of operations.
Conversion to Direct Sales Force
Historically, the Company has distributed its eyeglass frames to
independent optical retailers in the United States (other than California and
Arizona) through distributors. Sales through United States distributors
accounted for approximately 37% of the Company's total net sales during the
nine months ended July 31, 1999. Effective October 1, 1999, the Company
replaced all but two of its 24 domestic distributors with its own direct
national sales force of approximately 90 sales representatives. The Company's
conversion to a direct sales force results in both an increase in the sales
price the Company receives for products previously sold through distributors
and an increase in the selling expenses associated with the sale of these
products. Unit sales prices to optical retailers are 60% to 70% greater than
sales prices to distributors. In addition, based on the same number of unit
sales as in prior periods, the Company anticipates that its selling expenses
will increase as a percentage of net sales, primarily as a result of
commissions payable to sales representatives. The Company believes it must
expand its domestic direct sales force to approximately 130 sales
representatives to generate unit sales volumes commensurate with unit sales
volumes through its prior distributor network and the increased volume due to
the introduction of new product lines in fiscal 2000. While the Company is
aggressively seeking qualified sales representatives, no assurance can be
given as to when, if ever, the Company will be able to employ those additional
representatives or that the number of representatives will generate the unit
sales volumes which could have been generated through its distributor network.
There can be no assurance that the Company will be successful in making the
transition to a national direct sales force. Failure to do so could have a
material adverse impact on the Company's business, operating results and
financial condition.
Substantial Dependence upon Laura Ashley and Eddie Bauer Licenses
Net sales of Laura Ashley Eyewear and Eddie Bauer Eyewear accounted for 77%
and 75% of the Company's net sales in fiscal 1998 and fiscal 1999,
respectively. While the Company intends to continue reducing its dependence on
the Laura Ashley Eyewear and Eddie Bauer Eyewear lines through the development
and promotion of COACH Eyewear, Nicole Miller Eyewear, Dakota Smith Eyewear
and bebe eyes, as well as its own house brands, the Company expects the Laura
Ashley and Eddie Bauer Eyewear lines to continue to be the Company's leading
sources of revenue for the near future. The Company markets Laura Ashley
Eyewear through an exclusive license which terminates in 2001, but may be
renewed by the Company at least through January 2006 so long as the Company is
not in breach of the license agreement and meets certain minimum net sales
requirements. The Company markets Eddie Bauer Eyewear through an exclusive
license which terminates in December 2002, but may be renewed by the Company
at least through 2008 so long as the Company is not in material default and
meets certain minimum net sales and royalty requirements. Each of Laura Ashley
and Eddie Bauer may terminate its respective license before its term expires
under certain circumstances, including a material default by the Company or
certain defined changes in control of the Company.
Management of Growth
The Company has grown rapidly in recent years, with net sales increasing
from $20.1 million in fiscal 1994 to $44 million in fiscal 1999, and the
number of employees increasing from approximately 50 at October 31, 1994 to
239 at October 31, 1999. During fiscal 1999, the Company entered into licence
agreements for COACH Eyewear, Eddie Bauer Performance Sunwear (with Oakley's
patented XYZ lens technology), and bebe eyes, and acquired the license for
Nicole Miller Eyewear and the brand name Dakota Smith, thereby making possible
growth in the Company's net sales. Further, in fiscal 1999 the Company added a
new national direct sales force, and upgraded its management information
systems, as well as its warehouse and other operations. The
23
<PAGE>
Company's ability to manage its growth effectively will require it to continue
to improve its operational, financial and management information systems and
controls and to train, motivate and manage a larger number of employees. There
can be no assurance that the Company will be able to sustain its historic rate
of revenue growth, continue its profitable operations or manage future growth
successfully.
Approval Requirements of Brand-Name Licensors
The Company's business is predominantly based on its brand-name licensing
relationships. Each of the Company's licenses requires mutual agreement of the
parties for significant matters. Each of these licensors has final approval
over all eyeglass frames and other products bearing the licensor's proprietary
marks, and the frames must meet the licensor's general design specifications
and quality standards. Consequently, each licensor may, in the exercise of its
approval rights, delay the distribution of eyeglass frames bearing its
proprietary marks. The Company expects that each future license it obtains
will contain similar approval provisions. Accordingly, there can be no
assurance that the Company will be able to continue to maintain good
relationships with each licensor, or that the Company will not be subject to
delays resulting from disagreements with, or an inability to obtain approvals
from, its licensors. These delays could materially and adversely affect the
Company's business, operating results and financial condition.
Limitations on Ability to Distribute other Brand-Name Eyeglass Frames
Each of the Company's licenses limits the Company's right to market and
sell products with competing brand names. The Laura Ashley license prohibits
the Company from selling any range of designer eyewear that is similar to
Laura Ashley Eyewear in price and any of style, market position and market
segment. The Eddie Bauer license, the COACH license and the bebe license
prohibit the Company from entering into license agreements with companies
which Eddie Bauer, COACH and bebe, respectively, believe are its direct
competitors. The Hart Schaffner & Marx license prohibits the Company from
marketing and selling another men's brand of eyeglass frames under a well-
known fashion name with a wholesale price in excess of $40. The Company
expects that each future license it obtains will contain some limitations on
competition within market segments. The Company's growth, therefore, will be
limited to capitalizing on its existing licenses in the prescription eyeglass
market, introducing eyeglass frames in other segments of the prescription
eyeglass market, and manufacturing and distributing products other than
prescription eyeglass frames such as sunglasses. In addition, there can be no
assurance that disagreements will not arise between the Company and its
licensors regarding whether certain brand-name lines would be prohibited by
their respective license agreements. Disagreements with licensors could
adversely affect sales of the Company's existing eyeglass frames or prevent
the Company from introducing new eyewear products in market segments the
Company believes are not being served by its existing products.
Dependence Upon Contract Manufacturers; Foreign Trade Regulation
The Company's frames are manufactured to its specifications by a number of
contract manufacturers located outside the United States, principally in Hong
Kong/China, Japan, Italy and France. The manufacture of high quality metal
frames is a labor-intensive process which can require over 200 production
steps (including a large number of quality-control procedures) and from 90 to
180 days of production time. These long lead times increase the risk of
overstocking, if the Company overestimates the demand for a new style, or
understocking, which can result in lost sales if the Company underestimates
demand for a new style. While a number of contract manufacturers exist
throughout the world, there can be no assurance that an interruption in the
manufacture of the Company's eyeglass frames will not occur. An interruption
occurring at one manufacturing site that requires the Company to change to a
different manufacturer could cause significant delays in the distribution of
the styles affected. This could cause the Company to miss delivery schedules
for these styles, which could materially and adversely affect the Company's
business, operating results and financial condition.
In addition, the purchase of goods manufactured in foreign countries is
subject to a number of risks, including foreign exchange rate fluctuations,
economic disruptions, transportation delays and interruptions,
24
<PAGE>
increases in tariffs and duties, changes in import and export controls and
other changes in governmental policies. For frames purchased other than from
Hong Kong/China manufacturers, the Company pays for its frames in the currency
of the country in which the manufacturer is located and thus the costs (in
United States dollars) of the frames vary based upon currency fluctuations.
Increases and decreases in costs (in United States dollars) resulting from
currency fluctuations generally do not affect the price at which the Company
sells its frames, and thus currency fluctuations can impact the Company's
gross margin and results of operations. In fiscal 1999, Signature used
manufacturers principally in Japan, Hong Kong/China, Italy and France, which
accounted for 37.3%, 35.2%, 11.8% and 3.5%, respectively, (in cost) of the
frames purchased by the Company.
International Sales
International sales accounted for approximately 7.7%, 8.4%, and 8.7% of the
Company's net sales in fiscal 1997, fiscal 1998 and fiscal 1999, respectively.
These sales were primarily in England, Canada Australia, New Zealand, Holland
and Belguim. The Company's international business is subject to numerous
risks, including the need to comply with export and import laws, changes in
export or import controls, tariffs and other regulatory requirements, the
imposition of governmental controls, political and economic instability, trade
restrictions, the greater difficulty of administering business overseas and
general economic conditions. Although the Company's international sales are
principally in United States dollars, sales to international customers may
also be affected by changes in demand resulting from fluctuations in interest
and currency exchange rates. There can be no assurance that these factors will
not have a material adverse effect on the Company's business, operating
results and financial condition.
Product Returns
The Company has a product return policy which it believes is standard in
the optical industry. Under that policy, the Company generally accepts returns
of non-discontinued product for credit, upon presentment and without charge.
The Company's product returns for fiscal 1997, fiscal 1998, and fiscal 1999
amounted to 12.5%, 13.8%, and 19.2 % of gross sales (sales before returns),
excluding distributor returns of $4.4 million in connection with the Company's
decision to terminate its relationship with domestic distributors,
respectively. The Company anticipates that it will likely experience returns
at a rate significantly exceeding its historical levels, due to the Company's
decision to sell directly to United States independent optical retailers,
rather than through distributors. The Company maintains reserves for product
returns which it considers adequate; however, an increase in returns that
significantly exceeds the amount of those reserves could have a material
adverse impact on the Company's business, operating results and financial
condition.
Availability of Vision Correction Alternatives
The Company's future success could depend to a significant extent on the
availability and acceptance by the market of vision correction alternatives to
prescription eyeglasses, such as contact lenses and refractive (optical)
surgery, including a procedure named LASIK. While the Company does not believe
that contact lenses, refractive surgery or other vision correction
alternatives materially and adversely impact its business at present, there
can be no assurance that technological advances in, or reductions in the cost
of, vision correction alternatives will not occur in the future, resulting in
their more widespread use. Increased use of vision correction alternatives
could result in decreased use of the Company's eyewear products, which would
have a material adverse impact on the Company's business, operating results
and financial condition.
Acceptance of Eyeglass Frames; Unpredictability of Discretionary Consumer
Spending
The Company's success will depend to a significant extent on the market's
acceptance of the Company's brand-name eyeglass frames. If the Company is
unable to develop new, commercially successful styles to replace revenues from
older styles in the later stages of their life cycles, the Company's business,
operating results and financial condition could be materially and adversely
affected. The Company's future growth will depend in part upon the
effectiveness of the Company's marketing and sales efforts as well as the
availability and acceptance of
25
<PAGE>
other competing eyeglass frames released into the market place at or near the
same time, the availability of vision correction alternatives, general
economic conditions and other tangible and intangible factors, all of which
can change and cannot be predicted.
The Company's success also will depend to a significant extent upon a
number of factors relating to discretionary consumer spending, including the
trend in managed health care to allocate fewer dollars to the purchase of
eyeglass frames, and general economic conditions affecting disposable consumer
income, such as employment business conditions, interest rates and taxation.
Any significant adverse change in general economic conditions or uncertainties
regarding future economic prospects that adversely affect discretionary
consumer spending generally, and purchasers of prescription eyeglass frames
specifically, could have a material adverse effect on the Company's business,
operating results and financial condition.
Competition
The markets for prescription eyewear are intensely competitive. There are
thousands of styles, including hundreds with brand names. At retail, the
Company's eyewear styles compete with styles that do and do not have brand
names, styles in the same price range, and styles with similar design
concepts. To obtain board space at an optical retailer, the Company competes
against many companies, both foreign and domestic, including Luxottica Group
S.p.A. (operating in the United States through a number of its subsidiaries),
Safilo Group S.p.A. (operating in the United States through a number of its
subsidiaries) and Marchon Eyewear, Inc., as well as Signature's former
distributors. Signature's largest competitors have significantly greater
financial, technical, sales, manufacturing and other resources than the
Company. They also employ direct sales forces that are significantly larger
than the Company's, and are thus able to realize a higher gross profit margin.
At the major retail chains, the Company competes not only against other
eyewear suppliers, but also against the chains themselves, which license some
of their own brand names for design, manufacture and sale in their own stores.
Luxottica, one of the largest eyewear companies in the world, is vertically
integrated in that it manufactures frames, distributes them through direct
sales forces in the United States and throughout the world, and owns
LensCrafters, one of the largest United States retail optical chains.
The Company competes in its target markets through the quality of the brand
names it licenses, its marketing, merchandising and sales promotion programs,
the popularity of its frame designs, the reputation of its styles for quality,
and its pricing policies. There can be no assurance that the Company will be
able to compete successfully against current or future competitors or that
competitive pressures faced by the Company will not materially and adversely
affect its business, operating results and financial condition.
Dependence on Key Personnel
The Company's success has and will continue to depend to a significant
extent upon its executive officers, including Bernard Weiss (Chief Executive
Officer), Julie Heldman (President), Michael Prince (Chief Financial Officer),
Robert Fried (Senior Vice President of Marketing) and Robert Zeichick (Vice
President of Advertising and Sales Promotion). The loss of the services of one
or more of these key employees could have a material adverse effect on the
Company. The Company has entered into employment agreements with each of
Ms. Heldman and Messrs. Weiss, Prince, Fried and Zeichick, pursuant to which
they have agreed to render services to the Company until October 31, 2000. The
Company maintains and is the sole beneficiary of "key person" life insurance
on Ms. Heldman and Messrs. Weiss, Prince, Fried and Zeichick in the amount of
$1,500,000 each. In the event of the death of an executive officer, a portion
of the proceeds of the applicable policy would be used to pay the Company's
obligation under the officer's employment agreement. There can be no assurance
that the remaining proceeds of these policies will be sufficient to offset the
loss to the Company due to the death of that executive officer. In addition,
the Company's future success will depend in large part upon its ability to
attract, retain and motivate personnel with a variety of creative, technical
and managerial skills. There can be no assurance that the Company will be able
to retain and motivate its personnel or attract additional qualified members
to its management staff. The inability to attract and retain the necessary
managerial personnel could have a material adverse effect on the Company's
business, operating results and financial condition.
26
<PAGE>
Control by Directors and Executive Officers
The directors and executive officers of the Company own approximately 56.8%
of the Company's outstanding shares. As a result, the directors and executive
officers control the Company and its operations, including the approval of
significant corporate transactions and the election of at least a majority of
the Company's Board of Directors and thus the policies of the Company. The
voting power of the directors and executive officers could also serve to
discourage potential acquirors from seeking to acquire control of the Company
through the purchase of the Common Stock, which might depress the price of the
Common Stock.
Quarterly and Seasonal Fluctuations
The Company's results of operations have fluctuated from quarter to quarter
and the Company expects these fluctuations to continue in the future.
Historically, the Company's net sales in the quarter ending January 31 (its
first quarter) have been lower than net sales in other fiscal quarters. The
Company attributes lower net sales in the first fiscal quarter in part to low
consumer demand for prescription eyeglasses during the holiday season and
year-end inventory adjustments by distributors and independent optical
retailers. A factor which may significantly influence results of operations in
a particular quarter is the introduction of a brand-name collection, which
results in disproportionate levels of selling expenses due to additional
advertising, promotions, catalogs and in-store displays. Introduction of a new
brand may also generate a temporary increase in sales due to initial stocking
by retailers. Other factors which can influence the Company's results of
operations include customer demand, the mix of distribution channels through
which the eyeglass frames are sold, the mix of eyeglass frames sold, product
returns, delays in shipment and general economic conditions.
No Dividends Anticipated
The Company does not currently intend to declare or pay any cash dividends
and intends to retain earnings, if any, for the future operation and expansion
of the Company's business.
Possible Anti-Takeover Effects
The Company's Board of Directors has the authority to issue up to 5,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
any further vote or action by the shareholders. The Preferred Stock could be
issued with voting, liquidation, dividend and other rights superior to those
of the Common Stock. The Company has no present intention to issue any shares
of Preferred Stock. However, the rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding
voting stock of the Company, which may depress the market value of the Common
Stock. In addition, each of the Laura Ashley, Hart Schaffner & Marx, Eddie
Bauer, COACH and bebe licenses allows the licensor to terminate its license
upon certain events which under the license are deemed to result in a change
in control of the Company. The licensors' rights to terminate their licenses
upon a change in control of the Company could have the effect of discouraging
a third party from acquiring or attempting to acquire a controlling portion of
the outstanding voting stock of the Company and could thereby depress the
market value of the Common Stock.
Item 7A--Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risks, which include foreign exchange
rates and changes in U.S. interest rates. The Company does not engage in
financial transactions for trading or speculative purposes.
Foreign Currency Risks. During fiscal 1999, a maximum of $2.7 million and a
minimum of $0.5 miilion of the Company's accounts payable were payable in
foreign currency. These foreign currencies included Japanese
27
<PAGE>
Yen, Italian Lire and French Francs. Any significant change in foreign
currency exchange rates could therefore materially affect the Company's
business, operating results and financial condition. To monitor risks
associated with currency fluctuations, the Company on a weekly basis assesses
the volatility of certain foreign currencies and reviews the amounts and
expected payment dates of its purchase orders and accounts payable in those
currencies. Based on those factors, the Company may from time to time mitigate
some portion of that risk by purchasing forward commitments to deliver foreign
currency to the Company. The Company held forward commitments for foreign
currencies in the amount of $56,000 at October 31, 1999.
International sales accounted for approximately 8.7% of the Company's net
sales in fiscal 1999. Although the Company's international sales are
principally in United States dollars, sales to international customers may
also be affected by changes in demand resulting from fluctuations in interest
and currency exchange rates. There can be no assurance that these factors will
not have a material adverse effect on the Company's business, operating
results and financial condition. For frames purchased other than from Hong
Kong/China manufacturers, the Company pays for its frames in the currency of
the country in which the manufacturer is located and thus the costs (in United
States dollars) of the frames vary based upon currency fluctuations. Increases
and decreases in costs (in United States dollars) resulting from currency
fluctuations generally do not affect the price at which the Company sells its
frames, and thus currency fluctuation can impact the Company's gross margin.
Interest Rate Risk. Under the Company's Credit Agreement, its bank has
agreed to provide the Company a secured revolving line of credit up to an
aggregate of $5,000,000. At the Company's option, interest may be based on the
London Interbank Offered Rate ("LIBOR") plus 2%, or at the bank's prime rate.
At October 31, 1999, $1,500,000 was due to the bank under the Credit
Agreement. Any interest which may in the future become payable on the
Company's bank line of credit will be based on variable interest rates and
will therefore be affected by changes in market interest rates.
In December 1999, the Company and the bank amended the Credit Agreement to
increase the term loan commitment to $3,500,000 payable in 48 equal monthly
installments. The interest rate under the term loan will initially be 8.52%
until December 31, 2001, From January 1, 2002, the interest rate will be based
on LIBOR plus 2.5%.
In addition, the Company has fixed income investments consisting of cash
equivalents, which are also affected by changes in market interest rates. The
Company does not use derivative financial instruments in its investment
portfolio. The Company places its cash equivalents with high-quality financial
institutions, limits the amount of credit exposure to any one institution and
has established investment guidelines relative to diversification and
maturities designed to maintain safety and liquidity.
28
<PAGE>
Item 8--Financial Statements and Supplementary Data
SIGNATURE EYEWEAR, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INDEPENDENT AUDITORS' REPORT............................................... 30
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets, October 31, 1999 and 1998................... 31
Consolidated Statement of Operations, Years Ended October 31, 1999, 1998
and 1997 ............................................................... 32
Consolidated Statement of Changes in Stockholders' Equity, Years Ended
October 31, 1999, 1998 and 1997 ........................................ 33
Consolidated Statement of Cash Flows, Years Ended October 31, 1999, 1998
and 1997 ............................................................... 34
Notes to the Consolidated Financial Statements........................... 35
</TABLE>
29
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Signature Eyewear, Inc.
We have audited the accompanying consolidated balance sheets of SIGNATURE
EYEWEAR, INC. AND SUBSIDIARIES as of October 31, 1999 and 1998 and the related
consolidated statements of operations, changes in stockholders' equity and
cash flows for each of the three years in the period ended October 31, 1999.
These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Signature
Eyewear, Inc. and Subsidiaries as of October 31, 1999 and 1998, and the
results of its operations and its cash flows for each of the three years in
the period ended October 31, 1999, in conformity with generally accepted
accounting principles.
/s/ Altschuler, Melvoin and Glasser LLP
Los Angeles, California
February 8, 2000
30
<PAGE>
SIGNATURE EYEWEAR, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
October 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................ $ 463,023 $ 4,256,655
Accounts receivable, trade (net of allowance for
doubtful accounts of $198,363 in 1999 and $71,468 in
1998)............................................... 6,550,057 5,854,722
Inventories.......................................... 16,636,474 11,308,589
Income taxes refundable.............................. 999,820 186,481
Deferred tax asset................................... 392,000 368,000
Prepaid expenses and other current assets............ 2,432,915 1,573,627
----------- -----------
27,474,289 23,548,074
----------- -----------
Property and Equipment (net of accumulated depreciation
and amortization)..................................... 1,711,203 1,472,954
----------- -----------
Other Assets:
Goodwill and other intangibles, net.................. 6,035,190 0
Deferred tax asset................................... 36,000 7,000
Deposits and other assets............................ 217,402 123,312
----------- -----------
6,288,592 130,312
----------- -----------
$35,474,084 $25,151,340
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade.............................. $ 6,285,490 $ 4,309,026
Notes payable........................................ 1,750,000 0
Current portion of long-term debt.................... 873,505 0
Accrued distributor credits.......................... 1,727,970 0
Accrued expenses and other current liabilities....... 1,696,701 1,189,463
----------- -----------
12,333,666 5,498,489
----------- -----------
Long-term Debt......................................... 5,137,193 237,906
----------- -----------
Commitments and Contingencies (Note 8)
Stockholders' Equity:
Preferred stock...................................... 0 0
Common stock (5,082,389 and 5,119,337 shares issued
and outstanding at October 31, 1999 and 1998)....... 9,214 9,251
Paid-in capital...................................... 14,441,996 14,544,284
Retained earnings.................................... 3,552,015 4,861,410
----------- -----------
18,003,225 19,414,945
----------- -----------
$35,474,084 $25,151,340
=========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
31
<PAGE>
SIGNATURE EYEWEAR, INC. AND SUBSIDIARIES
Consolidated Statement of Operations
Years Ended October 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net Sales............................... $44,064,475 $40,891,882 $33,175,733
Cost of Sales........................... 18,747,458 17,644,416 13,842,354
----------- ----------- -----------
Gross Profit............................ 25,317,017 23,247,466 19,333,379
----------- ----------- -----------
Operating Expenses:
Selling............................... 13,886,668 12,007,302 9,461,309
General and administrative............ 10,948,797 7,034,516 5,861,815
Restructuring cost.................... 2,634,500 0 0
----------- ----------- -----------
27,469,965 19,041,818 15,323,124
----------- ----------- -----------
Income (Loss) from Operations........... (2,152,948) 4,205,648 4,010,255
----------- ----------- -----------
Other:
Interest expense...................... (183,037) (8,227) (359,604)
Sundry income......................... 243,336 411,250 63,152
----------- ----------- -----------
60,299 403,023 (296,452)
----------- ----------- -----------
Income (Loss) before Income Taxes....... (2,092,649) 4,608,671 3,713,803
Provision (Benefit) for Income Taxes.... (783,254) 1,859,067 128,800
----------- ----------- -----------
Net Income (Loss)....................... $(1,309,395) $ 2,749,604 $ 3,585,003
=========== =========== ===========
Earnings (Loss) Per Share, Basic and
Diluted:
Earnings (Loss) per common share...... $ (0.26) $ 0.52
=========== ===========
Weighted average number of common
shares outstanding................... 5,095,259 5,254,156
=========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
32
<PAGE>
SIGNATURE EYEWEAR, INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Stockholders' Equity
Years Ended October 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Common Stock
Number of
Shares Stated Paid-in Retained
Issued Value Capital Earnings Total
------------ ------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance, November 1,
1996................... 3,600,527 $7,732 $ 413,029 $ 2,508,376 $ 2,929,137
Net Income.............. 0 0 0 3,585,003 3,585,003
Issuance of Common
Stock.................. 1,667,500 1,668 14,777,360 0 14,779,028
Dividends Paid.......... 0 0 0 (3,981,574) (3,981,574)
--------- ------ ----------- ----------- -----------
Balance, October 31,
1997................... 5,268,027 9,400 15,190,389 2,111,805 17,311,594
Net Income.............. 0 0 0 2,749,605 2,749,605
Repurchases of Common
Stock.................. (148,690) (149) (646,105) 0 (646,254)
--------- ------ ----------- ----------- -----------
Balance, October 31,
1998................... 5,119,337 9,251 14,544,284 4,861,410 19,414,945
Net Loss................ 0 0 0 (1,309,395) (1,309,395)
Issuance of Common
Stock.................. 50,000 50 251,966 0 252,016
Repurchases of Common
Stock.................. (86,948) (87) (354,254) 0 (354,341)
--------- ------ ----------- ----------- -----------
Balance, October 31,
1999................... 5,082,389 $9,214 $14,441,996 $ 3,552,015 $18,003,225
========= ====== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
33
<PAGE>
SIGNATURE EYEWEAR, INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Years Ended October 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss).................... $(1,309,395) $ 2,749,605 $ 3,585,003
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization...... 880,992 557,668 446,395
Provision for bad debts............ 41,614 11,152 15,316
Deferred income tax benefit........ (53,000) (157,000) (218,000)
Changes in assets--(increase)
decrease:
Accounts receivable, trade....... 37,494 (1,852,356) (179,084)
Inventories...................... (3,565,676) (4,480,976) (2,191,685)
Income taxes refundable.......... (813,339) (186,481) 0
Prepaid expenses and other
assets.......................... (719,922) (796,714) (347,619)
Changes in liabilities--increase
(decrease):
Accounts payable, trade.......... 976,023 2,091,103 (354,022)
Income taxes payable............. 0 (346,000) 346,000
Accrued distributor credits...... 1,727,970 0 0
Accrued expenses and other
liabilities..................... (290,725) 130,571 (46,854)
----------- ----------- ------------
Net cash provided by (used in)
operating activities................ (3,087,964) (2,279,428) 1,055,450
----------- ----------- ------------
Cash Flows from Investing Activities:
Purchases of property and equipment.. (623,781) (951,086) (485,557)
Acquisition of businesses, net of
cash acquired....................... (1,282,538) 0 0
Proceeds from sale of equipment...... 27,090 0 0
----------- ----------- ------------
Net cash used in investing
activities.......................... (1,879,229) (951,086) (485,557)
----------- ----------- ------------
Cash Flows from Financing Activities:
Borrowings on note payable, bank..... 1,500,000 0 8,850,000
Repayments on note payable, bank..... 0 0 (11,950,000)
Borrowings on long-term debt......... 500,000 0 500,000
Principal payments on long-term
debt................................ (472,098) 0 (848,323)
Issuance (Repurchases) of common
stock............................... (354,341) (646,254) 14,779,028
Dividends paid....................... 0 0 (3,981,574)
----------- ----------- ------------
Net cash provided by (used in)
financing activities................ 1,173,561 (646,254) 7,349,131
----------- ----------- ------------
Net Increase (Decrease) in Cash and
Cash Equivalents...................... (3,793,632) (3,876,768) 7,919,024
Cash and Cash Equivalents, Beginning of
Year.................................. 4,256,655 8,133,423 214,399
----------- ----------- ------------
Cash and Cash Equivalents, End of
Year.................................. $ 463,023 $ 4,256,655 $ 8,133,423
=========== =========== ============
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the year for:
Interest........................... $ 158,312 $ 8,227 $ 383,221
Income taxes....................... 83,084 2,555,677 1,220
Supplemental Schedule of Noncash
Investing and Financing Activities:
Purchase of equipment financed by
capital lease obligations........... $ 146,974 $ 0 $ 0
Acquisitions:
Fair value of assets acquired...... 3,092,000 0 0
Liabilities assumed................ (5,178,000) 0 0
Liabilities incurred............... (1,868,500) 0 0
Stock issued....................... (252,000) 0 0
</TABLE>
The accompanying notes are an integral part of this statement.
34
<PAGE>
SIGNATURE EYEWEAR, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
Note 1--Nature of Activities and Significant Accounting Policies
Signature Eyewear, Inc. and Subsidiaries (the "Company") designs, markets
and distributes eyeglass frames throughout the United States and
internationally. Primary operations are conducted from leased premises in
Inglewood, California with warehouse and sales offices in Grand Junction,
Colorado, and Belgium.
In September 1997, the Company issued 1,667,500 shares of its common stock
(including 67,500 shares upon exercise of an over-allotment option), in its
initial public offering (the "IPO"). Proceeds from the offering, net of
underwriting discounts and other related expenses totaling $1,895,972,
amounted to $14,779,028.
A summary of significant accounting policies is as follows:
Principles of Consolidation--The consolidated financial statements
include the accounts of Signature Eyewear, Inc. and its wholly-owned
subsidiaries, Signature Eyewear Canada Corporation and Great Western
Optical (see Note 2). All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates--In preparing financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
those estimates.
Inventories--Inventories (consisting of finished goods) are valued at
the lower of cost or market. Cost is computed using weighted average cost,
which approximates actual cost on a first-in, first-out basis.
Revenue Recognition--Revenue is recognized when merchandise is shipped.
An allowance for estimated product returns is established based upon actual
historical return percentages multiplied by current period sales less
actual returns.
Advertising Costs--The Company expenses all advertising costs as they
are incurred. Advertising expense for the years ended October 31, 1999,
1998 and 1997 amounted to $867,865, $782,354 and $660,108, respectively.
Depreciation and Amortization--Depreciation and amortization of property
and equipment are computed using the straight-line method over the useful
economic life of the assets. Depreciation and amortization of property and
equipment for tax reporting purposes are computed using various statutory
methods as provided in the Internal Revenue Code.
Goodwill and Other Intangible Assets--Goodwill represents the excess of
purchase price over the fair value of net assets acquired (see Note 2)
which is amortized on the straight-line basis over 20 years. Other
intangible assets include covenants not to compete and various trademarks
which are being amortized on a straight-line basis over periods ranging
from 2 to 20 years.
Income Taxes--Through September 15, 1997, the Company was treated as an
S corporation under the Internal Revenue Code, whereby income or loss of
the Company was allocated to its stockholders, by inclusion in their
respective individual income tax returns. Accordingly, no liability or
provision for federal income taxes was reflected in the accompanying
financial statements, nor were any deferred taxes provided for temporary
differences between tax and financial reporting. Provision for state income
taxes had been provided based upon the applicable state income tax rates,
net of income tax credits and deductions.
Effective September 16, 1997, the Company's S corporation status was
terminated upon its IPO. As a result of this termination, the Company
adopted Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes", which requires the use of the "liability method" of
accounting for income
35
<PAGE>
SIGNATURE EYEWEAR, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 1--Nature of Activities and Significant Accounting Policies (Continued)
taxes. Accordingly, deferred income taxes are provided for temporary
differences between financial statement and tax bases of certain assets and
liabilities. Deferred income tax assets and liabilities are recognized for
the expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred income
tax assets and liabilities are determined based on the financial statement
and tax bases of assets and liabilities (Note 7).
Cash Equivalents--The Company considers all highly liquid debt
instruments with an original maturity of three months or less to be cash
equivalents.
Financial Instruments--The Company's financial instruments, when valued
using market interest rates, would not be materially different from the
amounts presented in the financial statements.
Impairment of Assets--The Company recognizes impairment losses when
expected future cash flows are less than the assets' carrying value.
Accordingly, when indicators of impairment are present, the Company
evaluates the carrying value of property, plant and equipment and
intangibles in relation to the operating performance and future
undiscounted cash flows of the underlying business. The Company adjusts the
net book value of the underlying assets if the sum of expected future cash
flows is less than book value.
Foreign Currency Translation--Substantially all of the Company's
international operations use their local currency as their functional
currency. Assets and liabilities are, therefore, translated at exchange
rates in effect at the balance sheet date and income and expense accounts
at average exchange rates during the year. Significant resulting
translation adjustments are recorded directly to a separate component of
shareholders' equity.
Accounting for Derivative Instruments and Hedging Activities--Statement
of Financial Accounting Standards ("SFAS") No. 137, "Accounting for
Derivative Instruments and Hedging Activities", has deferred the effective
date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning
after June 15, 2000. This statement requires that certain derivative
instruments be recognized in balance sheets at fair value and that changes
in fair value be recognized in operations. Additional guidance is also
provided to determine when hedge accounting treatment is appropriate
whereby hedging gains and losses are offset by losses and gains related
directly to the hedged item. The Company believes that it is already in
substantial compliance with the accounting requirements as set forth in
this new pronouncement and therefore believes that adoption will not have a
significant impact on financial condition or operating results.
Reclassifications--Certain reclassifications have been made to
previously-reported financial statements to conform to this year's
presentation and have no effect on previously reported net income.
Note 2--Business Acquisitions
On June 23, 1999, the Company acquired substantially all of the assets (the
"Asset Acquisition") of California Design Studio, Inc. ("CDS"), including its
Dakota Smith proprietary name, and an exclusive license for Nicole Miller
Eyewear. Total consideration was approximately $7,394,000, consisting of a
cash payment of $800,000, payment in full of the $600,000 existing CDS bank
loan, the issuance of an unsecured promissory note in the principal amount of
$1,250,000 and the assumption of approximately $4,744,000 of the liabilities
of CDS. Additionally, the Company recorded $351,000 of acquisition-related
expenses.
36
<PAGE>
SIGNATURE EYEWEAR, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2--Business Acquisitions (Continued)
The Asset Acquisition of CDS has been accounted for using the purchase
method of accounting. The purchase price has been allocated based upon the
following approximate fair values on the date of the acquisition:
<TABLE>
<S> <C>
Current assets................................................... $2,205,000
Property and equipment........................................... 170,000
Goodwill......................................................... 5,105,000
Other intangibles................................................ 148,000
Other noncurrent assets.......................................... 117,000
----------
Purchase price................................................... $7,745,000
==========
</TABLE>
The $5,105,000 excess of the purchase price over the fair value of the net
assets acquired has been recorded as goodwill. In connection with the Asset
Acquisition, the Company entered into a covenant not to compete agreement as
well as a consulting agreement with the sole shareholder of CDS. The
consideration for the covenant not to compete was $600,000.
The following table reflects unaudited pro forma combined results of
operations of the Company and CDS on the basis that the acquisition had taken
place at the beginning of the fiscal year for each of the periods presented:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Net sales.......................................... $48,515,725 $51,268,985
Net income (loss).................................. (2,147,922) 2,298,975
Earnings (loss) per share.......................... (0.42) 0.44
</TABLE>
Effective August 1, 1999, the Company acquired 100% of the capital stock
(the "Stock Acquisition") of Great Western Optical ("GWO"), a privately-held
corporation. GWO's principal business was the distribution of the Company's
products. The purchase price for the Stock Acquisition was approximately
$519,500, consisting of the issuance of 50,000 shares of the Company's common
stock and 50,000 of stock warrants, valued at $252,000, a note payable for
$250,000 and acquisition-related expenses of $17,500.
The Stock Acquisition of GWO has been accounted for using the purchase
method of accounting. The purchase price has been allocated based upon the
following approximate fair values on the date of the acquisition:
<TABLE>
<S> <C>
Current assets................................................... $ 565,000
Property and equipment........................................... 4,500
Goodwill......................................................... 384,000
Liabilities...................................................... (434,000)
---------
Purchase price................................................... $ 519,500
=========
</TABLE>
The $384,000 excess of the purchase price over the fair value of the net
assets acquired has been recorded as goodwill. In connection with the Stock
Acquisition, the Company entered into a covenant not to compete agreement as
well as a consulting agreement with the sole shareholder of the seller
corporation.
The Stock Acquisition provides for a purchase price adjustment if the per
share market value of the 50,000 shares of common stock issued at the initial
Stock Acquisition date is below $7 on July 31, 2001.
37
<PAGE>
SIGNATURE EYEWEAR, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3--Restructuring Costs
Historically the Company has distributed its eyeglass frames to independent
optical retailers in the United States (other than California and Arizona)
through distributors. Sales through United States distributors accounted for
approximately 38%, 51% and 47% of the Company's total net sales for the years
ended October 31, 1999, 1998 and 1997. The Company has changed its sales
strategy by replacing its domestic network of distributors with its own direct
national sales force. Consequently, the Company has experienced an abnormally
high rate of return attributable to terminated distributors. The $2,634,500
cost associated with these merchandise returns is reflected as a restructuring
expense.
Note 4--Property and Equipment
Property and equipment (stated at cost) as of October 31, 1999 and 1998
consisted of the following:
<TABLE>
<CAPTION>
Periods of
Depreciation
or Amortization 1999 1998
--------------- ---------- ----------
<S> <C> <C> <C>
Office furniture and fixtures......... 7 years $ 955,908 $ 591,071
Computer equipment.................... 3 to 7 years 1,246,737 883,073
Software.............................. 3 years 597,975 572,541
Vehicles.............................. 7 years 37,637 129,718
Leasehold improvements................ Term of lease 749,019 619,784
Machinery and equipment held under
capitalized leases................... 5 years 146,974 140,438
Machinery and equipment............... 5 years 147,503 0
---------- ----------
3,881,753 2,936,625
Less accumulated depreciation and
amortization (including amortization
on capitalized leases of $7,349 in
1999 and $122,999 in 1998)........... 2,170,550 1,463,671
---------- ----------
Net book value........................ $1,711,203 $1,472,954
========== ==========
</TABLE>
Provision for depreciation and amortization charged to operations for the
years ended October 31, 1999, 1998 and 1997 amounted to $682,131, $557,668 and
$446,395, respectively (including capitalized lease amortization of $7,349,
$10,050 and $18,256, respectively).
Note 5--Notes Payable
Notes payable at October 31, 1999 consisted of the following:
<TABLE>
<S> <C>
Revolving Credit Agreement payable to a commercial bank
("Bank") in the amount of $5,000,000 (secured by substantially
all the Company's assets; interest at the London Interbank
Offered Rate ["LIBOR"] plus 2% or the Bank's prime rate [at
the Company's option]; weighted average interest rate of
8.25%; expiring March 31, 2000)............................... $11,500,000
Note payable (unsecured; interest at 6% per annum; due January
10, 2000 [see Note 2])........................................ 250,000
-----------
$ 1,750,000
===========
</TABLE>
The Credit Agreement includes various covenants that require the Company to
maintain a minimum amount of tangible net worth, as defined, minimum net
income and certain other financial and debt service coverage
38
<PAGE>
SIGNATURE EYEWEAR, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5--Notes Payable (Continued)
ratios. The Company was not in compliance with these covenants at October 31,
1999, but received a waiver of these covenant violations.
The Company had no notes payable outstanding at October 31, 1998.
Note 6--Long-term Debt
Long-term debt at October 31, 1999 consisted of the following:
<TABLE>
<S> <C>
Term note payable, Bank (secured by substantially all the assets
of the Company; payable in monthly installments of $12,242 plus
interest at 8.52% per annum until December 31, 2001; LIBOR plus
2.5% thereafter; matures on December 1, 2004).................. $ 500,000
Note payable, CDS (unsecured; payable in monthly installments of
$17,042, including interest at 7% per annum; matures on June
23, 2002)...................................................... 1,210,655
Obligation to vendor (unsecured; $4,195,847 principal less
$639,043 unamortized discount; payable in monthly installments
of $50,000, including interest imputed at 7.37% per annum;
matures on July 23, 2002)...................................... 3,556,804
Note payable, lessor (unsecured; payable in monthly installments
of $4,134, including interest at 10% per annum; matures on May
1, 2005)....................................................... 211,608
</TABLE>
<TABLE>
<S> <C>
Obligation in conjunction with acquisition of CDS--see Note 2
(payable in quarterly installments of $75,000 commencing
September 30, 2000; matures on June 30, 2001)................... 300,000
Liability for machinery and equipment under various capitalized
lease agreements (interest rates ranging from 8.12% to 11.14%
per annum; maturing at various dates through August 2004;
secured by certain machinery and equipment)..................... 231,631
----------
6,010,698
Less current portion............................................. 873,505
----------
$5,137,193
==========
</TABLE>
The Company had no long-term debt at October 31, 1998.
39
<PAGE>
SIGNATURE EYEWEAR, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6--Long-term Debt (Continued)
Future minimum payments as of October 31, 1999, under the aforementioned
long-term debt, are as follows:
<TABLE>
<CAPTION>
Capitalized
Lease
Obligations Agreements Total
----------- ----------- ----------
<S> <C> <C> <C>
October 31,
2000..................................... $1,057,638 $ 84,917 $1,142,555
2001..................................... 1,240,532 73,516 1,314,048
2002..................................... 4,007,399 51,998 4,059,397
2003..................................... 40,167 35,918 76,085
2004..................................... 44,373 26,938 71,311
Thereafter............................... 28,001 0 28,001
---------- -------- ----------
6,418,110 273,287 6,691,397
Less imputed interest thereon............ 639,043 41,656 680,699
---------- -------- ----------
$5,779,067 $231,631 $6,010,698
========== ======== ==========
</TABLE>
Effective December 17, 1999, the Company entered into an amendment to the
Credit Agreement with the Bank which, among other things, extended the term
loan period and increased the term loan commitment from $500,000 to
$3,500,000.
Note 7--Income Taxes
Through the period ended September 15, 1997, the Company had been treated
as an S corporation under the Internal Revenue Code and therefore no
provisions for income taxes were reflected in the financial statements for
such periods (see Note 1).
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
1999 1998 1997
--------- ---------- ---------
<S> <C> <C> <C>
Current:
Federal................................ $(730,254) $1,653,000 $ 270,970
State.................................. 800 363,000 75,830
Deferred................................. (53,800) (157,000) (48,000)
Deferred taxes relating to change in tax
status.................................. 0 0 (170,000)
--------- ---------- ---------
$(783,254) $1,859,000 $ 128,800
========= ========== =========
</TABLE>
40
<PAGE>
SIGNATURE EYEWEAR, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 7--Income Taxes (Continued)
At October 31, 1999 and 1998, the Company's net deferred tax asset and
liability consisted of the following:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Current--deferred tax assets:
Allowance for doubtful accounts...................... $ 90,000 $ 31,000
Capitalization of inventory costs.................... 279,000 236,000
Inventory reserve.................................... 33,000 0
State deferred tax liability (asset)................. (10,000) 101,000
-------- --------
$392,000 $368,000
======== ========
Long-term:
Deferred tax liability--excess depreciation and
amortization taken for income tax reporting
purposes............................................ $ 32,000 $(11,000)
Deferred tax asset--state deferred tax asset......... 4,000 18,000
-------- --------
$ 36,000 $ 7,000
======== ========
</TABLE>
A reconciliation of the provision for income taxes and the amount computed
by applying the federal statutory rate to income before income tax expense is
as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ----------
<S> <C> <C>
Computed income tax expense (benefit) at federal
statutory rate.................................... $(711,500) $1,567,000
Increase (reduction) resulting from:
State income taxes............................... (32,000) 363,000
Tax credits...................................... 0 (70,000)
All other (net).................................. (39,754) (1,000)
--------- ----------
$(783,254) $1,859,000
========= ==========
</TABLE>
Note 8--Commitments
Operating Leases--The Company maintains its principal offices and warehouse
in leased facilities in Inglewood, California, under an operating lease which
expires on May 31, 2005. The lease agreement provides for minimum monthly
rental payments of $37,636. The Company is also responsible for the payment of
(i) common area operating expenses (as defined), (ii) utilities, and (iii)
insurance. The security deposit on the lease includes a $70,000 irrevocable
standby letter of credit in favor of the lessor. The lease agreement provides
for an option to extend the term of the lease for five additional years.
During fiscal 1999, the Company entered into various operating leases for
hardware, software, and technical support services in connection with
implementation of a computer system. The lease agreements provide for minimum
monthly payments of $92,845. Upon expiration, the lease agreements provide for
an option to extend the term of the lease for 12 months or more at a fair
market rental value as mutually agreed to by the lessor and the Company.
41
<PAGE>
SIGNATURE EYEWEAR, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8--Commitments (Continued)
Future minimum lease payments relating to the above operating leases at
October 31, 1999 are as follows:
<TABLE>
<CAPTION>
October 31, Amount
----------- ----------
<S> <C>
2000......................................................... $1,604,798
2001......................................................... 1,614,075
2002......................................................... 1,534,398
2003......................................................... 622,061
2004......................................................... 451,628
2005......................................................... 263,450
----------
$6,090,410
==========
</TABLE>
Total facilities-related rent expense for the years ended October 31, 1999,
1998 and 1997 amounted to $420,471, $327,269 and $289,198, respectively. Lease
expense with respect to the computer system amounted to $512,252 for the year
ended October 31, 1999.
License Agreements--The Company has a license agreement with Laura Ashley
Manufacturing, B.V. and Laura Ashley Limited, which grants the Company certain
rights to use "Laura Ashley" trademarks in connection with the distribution,
marketing and sale of Laura Ashley eyewear products. The license period
extends through January 31, 2001, with automatic one-year renewals thereafter
through at least 2006, provided that specified minimum sales are achieved.
The Company has a license agreement with Hart Schaffner & Marx, which
grants the Company certain rights to use "Hart Schaffner & Marx" trademarks in
connection with the distribution, marketing and sale of Hart Schaffner & Marx
eyewear products. The license period extends through December 31, 2002, and
may be renewed for three-year terms in perpetuity provided that specified
minimum sales are achieved and the Company is not in default under the license
agreement.
The Company has a license agreement with Eddie Bauer, Inc., which grants
the Company certain rights to use "Eddie Bauer" trademarks in connection with
the distribution, marketing and sale of Eddie Bauer eyewear products. The
license period extends through December 31, 2002 and can be renewed for two
consecutive three-year terms (as defined), provided that specified minimum
sales are achieved and the Company is not in material default under the
license agreement.
In March 1999, the Company amended its license agreement with Eddie Bauer
to authorize the Company to design, manufacture and market Eddie Bauer
Performance Sunwear using patented technology lenses provided by Oakley, Inc.
In March 1999, the Company entered into an agreement with Oakley, Inc.,
pursuant to which Oakley will supply the Company its patented optical lenses
for use in Eddie Bauer Performance Sunwear. The agreement extends through
December 31, 2002, with an automatic two-year renewal term (as defined),
provided that specified minimum sales are achieved and the Company is not in
default under the agreement.
In March 1999, the Company entered into a license agreement with Coach, a
division of Sara Lee Corporation, which grants the Company certain rights to
use "Coach" and related trademarks in connection with the distribution,
marketing and sale of Coach eyewear products. The license period extends
through April 30, 2010. In addition to a royalty based on net sales, the
Company has agreed to issue to Coach, upon the introduction of Coach Eyewear,
three-year warrants to purchase 50,000 shares of common stock of the Company
at an exercise price of $6.50 per share and five-year warrants to purchase an
additional 50,000 shares of common stock of the Company at an exercise price
of $9.50 per share.
42
<PAGE>
SIGNATURE EYEWEAR, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8--Commitments (Continued)
In connection with the Asset Acquisition of CDS (see Note 2), the Company
acquired CDS's license with Kobra International, which grants the Company
rights to use the "Nicole Miller" trademark in connection with the
distribution, marketing and sale of eyewear products. The license period
extends until March 31, 2003, provided that specified minimum sales are
achieved and the Company is not in material default under the agreement.
In September 1999, the Company entered into a license agreement with bebe
stores, inc., which grants the Company certain rights to use the "bebe"
trademark in connection with the distribution, marketing and sale of bebe
eyewear products. The license period extends through March 31, 2003, and can
be renewed for two three-year terms (as defined) thereafter, provided that
specified minimum sales are achieved and the Company is not in material
default under the license agreement.
Total minimum royalties under all of the Company's license agreements are
as follows:
<TABLE>
<CAPTION>
October 31, Amount
----------- -----------
<S> <C>
2000........................................................ $ 2,701,250
2001........................................................ 3,564,333
2002........................................................ 4,011,217
2003........................................................ 3,492,054
2004........................................................ 3,507,985
Thereafter................................................... 8,144,071
-----------
$25,420,910
===========
</TABLE>
Total royalty expense charged to operations for the years ended October 31,
1999, 1998 and 1997 amounted to $2,413,285, $2,460,329 and $1,732,873,
respectively.
Employment Agreements--Certain executive officers have entered into
employment agreements with the Company. Pursuant to each agreement, the
officer has agreed to render services until October 31, 2000, and will be
entitled to a stated salary subject to increases from time to time as approved
by the Board of Directors or Compensation Committee. The aggregate commitment
for future salaries at October 31, 1999, excluding bonuses, was $1,090,000.
Note 9--Stock Warrants and Options
In connection with the IPO, in September 1997 the Company sold to Fechtor,
Detwiler & Co., Inc. and Van Kasper Company, the managing underwriters of the
offering, warrants to purchase 180,000 shares of common stock for $12 per
share. The warrants expire on September 16, 2002. No warrants were exercised
during the year ended October 31, 1999.
In connection with the acquisition of Great Western Optical, the Company
issued warrants to purchase 50,000 shares of common stock for $7.50 per share.
The warrants expire on September 10, 2004. No warrants were exercised during
the year ended October 31, 1999.
43
<PAGE>
SIGNATURE EYEWEAR, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9--Stock Warrants and Options (Continued)
The Company adopted a Stock Plan (the "Plan"). whereby a maximum of 800,000
shares of common stock may be issued from time to time to directors, officers,
employees and consultants pursuant to awards such as stock options and
restricted stock sales. The Plan terminates in 2007. No compensation expense
was required to be recorded over the respective service periods required of
the optionees for existing options, because the exercise price was not less
than the fair market value of the common stock on the grant dates. The
following is a summary of stock option activity under the Plan:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- ----------------
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of year................ 477,000 $ 10.00 454,250 $10.00 454,250 $10.00
Granted................. 225,700 $ 4.00 43,500 $10.00 0
Canceled................ (67,200) (20,750) $10.00 0
------- ------- -------
Outstanding, end of
year................... 635,500 $4-10.00 477,000 $10.00 454,250 $10.00
======= ======= =======
</TABLE>
The following is a summary of options outstanding under the Plan at October
31, 1999:
<TABLE>
<CAPTION>
Number of Remaining Number of
Exercise Options Contractual Exercisable
Price Outstanding Life Options
-------- ----------- ----------- -----------
<S> <C> <C> <C>
$4.00-$10.00 635,500 8 461,500
</TABLE>
The Company has adopted only the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation" and continues to account for stock
options in accordance with Accounting Principles Board Opinion No. 25.
On a pro-forma basis, the effect of stock-based compensation had the
Company adopted SFAS 123 is as follows:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Net income (loss):
As reported....................................... $(1,309,395) $2,749,605
Pro-forma......................................... (1,933,721) 2,242,005
Basic and diluted earnings (loss) per share:
As reported....................................... (0.26) 0.52
Pro-forma......................................... (0.38) 0.43
</TABLE>
The weighted-average grant date fair value of options granted was $2.02
during 1999. Fair value of options was calculated by using the Black-Scholes
options pricing model using the following assumptions for 1999 activity:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Expected life................................................ 6 years 6 years
Risk-free interest rate...................................... 5.825% 5.00%
Expected volatility.......................................... 46.570% 82.15%
Dividend yield............................................... 0.000% 0.00%
</TABLE>
44
<PAGE>
SIGNATURE EYEWEAR, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 10--Earnings Per Share
The Company has adopted SFAS No. 128 which establishes standards for
computing and presenting earnings per share by replacing the presentation of
primary earnings per share with a presentation of basic earnings per share. It
also requires the dual presentation of basic and diluted earnings per share on
the face of the income statement. Earnings per share is calculated as follows:
<TABLE>
<CAPTION>
For the Year Ended October 31, 1999
------------------------------------
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic and diluted EPS:
Loss to common stockholders........... $(1,309,395) 5,095,259 $(0.26)
=========== ========= ======
</TABLE>
For the year ended October 31, 1999, there was no difference between basic
and diluted EPS. Warrants and options to purchase 230,000 shares and 635,500
shares, respectively, of common stock were outstanding during the year. They
were not included in the computation of diluted EPS because the warrants' and
options' exercise prices were greater than the average market price of the
common stock during the year ended October 31, 1999.
<TABLE>
<CAPTION>
For the Year Ended October 31, 1999
------------------------------------
Net Loss Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic and diluted EPS:
Income available to common
stockholders....................... $(2,749,605) 5,254,156 $(0.52)
=========== ========= ======
</TABLE>
For the year ended October 31, 1998, there was no difference between basic
and diluted EPS. Warrants and options to purchase 180,000 shares and 477,000
shares, respectively, of common stock at $12 and $10 per share, respectively,
were outstanding during the year. They were not included in the computation of
diluted EPS because the warrants' and options' exercise prices were greater
than the average market price of the common stock during the year ended
October 31, 1998.
Note 11--Stockholders' Equity
The Company's Articles of Incorporation authorized 30,000,000 shares of
common stock, par value $.001 per share, and 5,000,000 shares of preferred
stock, par value $.001 per share. In June 1997, a 3.175 to 1 split of the
Company's common stock was effected. All share and per share amounts included
in the accompanying financial statements and footnotes have been restated to
reflect the stock split.
The Board of Directors has the authority to issue the authorized and
unissued preferred stock in one or more series with such designations, rights
and preferences as may be determined from time to time by the Board of
Directors, without stockholder approval. No shares of the preferred stock were
issued as of October 31, 1999.
In September 1998, the Board of Directors authorized the repurchase of up
to $1,000,000 of the Company's common stock in the open market. During the
years ended October 31, 1999 and 1998, the Company had repurchased 86,948 and
148,690 shares of the Company's stock at an average price of $4.08 and $4.35
per share for an aggregate amount of $354,341 and $646,254, respectively.
Note 12--Employee Benefit Plan
On August 1, 1998, the Company adopted a 401(k) profit sharing plan
covering substantially all employees. Eligible employees may elect to
contribute up to 15% of their annual compensation, as defined, and may elect
to separately contribute up to 100% of their annual bonus (if any) to the
plan. The Company may also elect to make discretionary contributions. For the
year ended October 31, 1999, the Company made matching contributions of
$261,686 to the plan. The Company did not make a contribution for the year
ended October 31, 1998.
45
<PAGE>
Item 9--Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 10--Directors and Executive Officers of the Registrant
Information regarding directors and executive officers of the Registrant
will appear in the proxy statement for the 2000 Annual Meeting of
Shareholders, and is incorporated herein by reference.
Item 11--Executive Compensation
Information regarding executive compensation will appear in the proxy
statement for the 2000 Annual Meeting of Shareholders, and is incorporated
herein by reference.
Item 12--Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners and
management will appear in the proxy statement for the 2000 Annual Meeting of
Shareholders, and is incorporated herein by reference.
Item 13--Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions will
appear in the proxy statement for the 1999 Annual Meeting of Shareholders, and
is incorporated herein by reference.
PART IV
Item 14--Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents Filed As Part of Report:
1. Financial Statements:
Independent Auditor's Report;
Balance Sheets at October 31, 1998 and 1999;
Statement of Income for the years ended October 31, 1997, 1998 and
1999;
Statement of Changes in Stockholders' Equity for the years ended
October 31, 1997, 1998 and 1999; and
Statement of Cash Flows for the years ended October 31, 1997, 1998
and 1999.
2. Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts
3. Exhibits:
See attached Exhibit List.
(b) Reports on Form 8-K:
Report on Form 8-K dated September 7, 1999, reporting under Item 7
thereof the financial statements and pro-forma financial statements
giving effect to the acquisition by Registrant of substantially all of
the assets of California Design Studios, Inc.
46
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Signature Eyewear, Inc.
By: /s/ Julie Heldman
___________________________________
Julie Heldman
Co-Chairman of the Board and
President
(Principal Executive Officer)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Co-Chairman of the Board and February 15, 2000
____________________________________ Chief Executive Officer
Bernard Weiss
/s/ Julie Heldman Co-Chairman of the Board and February 15, 2000
____________________________________ President
Julie Heldman
* Chief Financial Officer and February 15, 2000
____________________________________ Director (Principal
Michael Prince Financial and Accounting
Officer)
* Director February 15, 2000
____________________________________
Maurice Buchsbaum
* Director February 15, 2000
____________________________________
Joel Johnson
* Director February 15, 2000
____________________________________
Daniel Warren
</TABLE>
*By: /s/ Julie Heldman
________________________________
Julie Heldman,
as Attorney-In-Fact
47
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- ----------------------------------------------------------------------
<C> <S>
3.1 Restated Articles of Incorporation of Registrant. Incorporated by
reference to Exhibit 3.1 to Registrant's Form S-1 (SEC Registration
No. 333-30017), filed with the Commission on June 25, 1997, as
amended.
3.2 Amended and Restated Bylaws of Registrant. Incorporated by reference
to Exhibit 3.2 to Registrant's Form S-1 (SEC Registration No. 333-
30017), filed with the Commission on June 25, 1997, as amended.
4.1 Specimen Stock Certificate of Common Stock of Registrant. Incorporated
by reference to Exhibit 4.1 to Registrant's Form S-1 (SEC Registration
No. 333-30017), filed with the Commission on June 25, 1997, as
amended.
10.1 Registrant's 1997 Stock Plan. Incorporated by reference to Exhibit
10.1 to Registrant's Form S-1 (SEC Registration No. 333-30017), filed
with the Commission on June 25, 1997, as amended.
10.2 Form of Registrant's Stock Option Agreement (Non-Statutory Stock
Option). Incorporated by reference to Exhibit 10.2 to Registrant's
Form S-1 (SEC Registration No. 333-30017), filed with the Commission
on June 25, 1997, as amended.
10.3 Form of Indemnification Agreement for Directors and Officers.
Incorporated by reference to Exhibit 10.3 to Registrant's Form S-1
(SEC Registration No. 333-30017), filed with the Commission on
June 25, 1997, as amended.
10.4 Tax Indemnification Agreement among Registrant and the Existing
Shareholders. Incorporated by reference to Exhibit 10.4 to
Registrant's Form S-1 (SEC Registration No. 333-30017), filed with the
Commission on June 25, 1997, as amended.
10.5 License Agreement, dated May 28, 1991, between Laura Ashley
Manufacturing B.V. and Registrant, as amended. Incorporated by
reference to Exhibit 10.5 to Registrant's Form S-1 (SEC Registration
No. 333-30017), filed with the Commission on June 25, 1997, as
amended. [Portions of this Exhibit have been deleted and filed
separately with the Securities and Exchange Commission pursuant to a
grant of Confidential Treatment.]
10.6 Lease Agreement, dated March 23, 1995, between the Registrant and
Roxbury Property Management, and Guaranty of Lease, dated March 23,
1995, between Julie Heldman and Bernard Weiss and Roxbury Property
Management. Incorporated by reference to Exhibit 10.6 to Registrant's
Form S-1 (SEC Registration No. 333-30017), filed with the Commission
on June 25, 1997, as amended.
10.7 Credit Agreement, dated as of October 27, 1997, between Registrant and
City National Bank. Incorporated by reference to Exhibit 10.7 to Form
10-K filed with the Commission on January 28, 1998.
10.8 Employment Agreement between the Registrant and Bernard Weiss.
Incorporated by reference to Exhibit 10.8 to Registrant's Form S-1
(SEC Registration No. 333-30017), filed with the Commission on June
25, 1997, as amended.
10.9 Employment Agreement between the Registrant and Julie Heldman.
Incorporated by reference to Exhibit 10.9 to Registrant's Form S-1
(SEC Registration No. 333-30017), filed with the Commission on June
25, 1997, as amended.
10.10 Employment Agreement between the Registrant and Michael Prince.
Incorporated by reference to Exhibit 10.10 to Registrant's Form S-1
(SEC Registration No. 333-30017), filed with the Commission on June
25, 1997, as amended.
10.11 Employment Agreement between the Registrant and Robert Fried.
Incorporated by reference to Exhibit 10.11 of Registrant's Form S-1
(SEC Registration No. 333-30017), filed with the Commission on June
25, 1997, as amended.
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------- ----------------------------------------------------------------------
<C> <S>
10.12 Employment Agreement between the Registrant and Robert Zeichick.
Incorporated by reference to Exhibit 10.12 of Registrant's Form S-1
(SEC Registration No. 333-30017), filed with the Commission on June
25, 1997, as amended.
10.13 License Agreement, dated January 12, 1996, between Hart Schaffner &
Marx and the Registrant. Incorporated by reference to Exhibit 10.13 to
Registrant's Form S-1 (SEC Registration No. 333-30017), filed with the
Commission on June 25, 1997, as amended. [Portions of this Exhibit
have been deleted and filed separately with the Securities and
Exchange Commission pursuant to a grant of Confidential Treatment.]
10.14 License Agreement, dated June 2, 1995, between Revlon Consumer
Products Corporation and the Registrant, as amended. Incorporated by
reference to Exhibit 10.14 to Registrant's Form S-1 (SEC Registration
No. 333-30017), filed with the Commission on June 25, 1997, as
amended. [Portions of this Exhibit have been deleted and filed
separately with the Securities and Exchange Commission pursuant to a
grant of Confidential Treatment.]
10.15 License Agreement, dated June 24, 1997, between Eddie Bauer, Inc. and
the Registrant. Incorporated by reference to Exhibit 10.15 to
Registrant's Form S-1 (SEC Registration No. 333-30017), filed with the
Commission on June 25, 1997, as amended. [Portions of this Exhibit
have been deleted and filed separately with the Securities and
Exchange Commission pursuant to a grant of Confidential Treatment.]
10.16 Form of Representatives' Warrant. Incorporated by reference to Exhibit
1.2 to Registrant's Form S-1 (SEC Registration No. 333-30017), filed
with the Commission on June 25, 1997, as amended.
10.17 First Amendment to Lease, dated May 5, 1998, between Roxbury Property
Management and the Registrant, and Second Amendment to Lease, dated
June 3, 1998, between Roxbury Property Management and the Registrant.
10.18 Promissory Note, dated as of December 8, 1998, between Registrant and
City National Bank. Incorporated by reference to Exhibit 10.1 to
Registrant's Quarterly Report of Form 10-Q for the quarter ended
January 31, 1999.
10.19 License Agreement, dated as of March 11, 1999, between the Registrant
and Coach, a division of Sara Lee Corporation. Incorporated by
reference to Exhibit 10.1 to Registrant's Quarterly Report of Form 10-
Q for the quarter ended April 30, 1999. [Portions of this exhibit have
been deleted and filed separately with the Securities and Exchange
Commission pursuant to a request for an order granting confidential
treatment.]
10.20 First Addendum to License Agreement Dated June 24, 1997, dated as of
March 26, 1999, between the Registrant and Eddie Bauer, Inc.
Incorporated by reference to Exhibit 10.2 to Registrant's Quarterly
Report of Form 10-Q for the quarter ended April 30, 1999. [Portions of
this exhibit have been omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for an order
granting confidential treatment.]
10.21 Asset Purchase Agreement, dated as of June 11, 1999, as amended by the
letter agreement, dated June 23, 1999, by and among Registrant,
California Design Studio, Inc., other parties identified on Exhibit A
to the Asset Purchase Agreement and Carlos Alberto Khantzis.
Incorporated by reference to Exhibit 2.1 to Registrant's Form 8-K/A
filed on September 7, 1999.
21 List of subsidiaries.
23.1 Consent of Altschuler, Melvoin and Glasser LLP.
24.1 Power of Attorney (included on signature page).*
27.1 Financial Data Schedule.
99.1 Schedule II--Valuation and Qualifying Accounts.
</TABLE>
- --------
* Previously filed.
49
<PAGE>
Exhibit 21
SUBSIDIARIES OF
SIGNATURE EYEWEAR, INC.
1. Great Western Optical, a Colorado corporation.
2. Signature Eyewear Canada Corporation, a Canadian Corporation.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
of Signature Eyewear, Inc. on Form S-8 (File No. 33-48109) of our report dated
February 8, 2000, on our audits of the consolidated financial statements and
financial statement schedule of Signature Eyewear, Inc. as of October 31, 1999
and 1998, and for each of the three years in the period ended October 31,
1999, which report is incorporated by reference in this Annual Report on Form
10K.
Los Angeles, California
February 14, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SIGNATURE
EYEWEAR INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FIANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> OCT-31-1999
<CASH> 463,023
<SECURITIES> 0
<RECEIVABLES> 6,748,420
<ALLOWANCES> 198,363
<INVENTORY> 16,636,474
<CURRENT-ASSETS> 27,474,289
<PP&E> 3,881,753
<DEPRECIATION> 2,170,550
<TOTAL-ASSETS> 35,474,084
<CURRENT-LIABILITIES> 12,333,666
<BONDS> 0
0
0
<COMMON> 9,214
<OTHER-SE> 17,994,011
<TOTAL-LIABILITY-AND-EQUITY> 35,474,084
<SALES> 44,064,475
<TOTAL-REVENUES> 44,307,811
<CGS> 18,747,458
<TOTAL-COSTS> 46,217,423
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 126,895
<INTEREST-EXPENSE> 183,037
<INCOME-PRETAX> (2,092,649)
<INCOME-TAX> (783,254)
<INCOME-CONTINUING> (1,309,395)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,309,395)
<EPS-BASIC> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
<PAGE>
Exhibit 99.1
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
To the Board of Directors and Stockholders
Signature Eyewear, Inc.
In connection with our audit of the consolidated financial statements of
Signature Eyewear, Inc. and Subsidiaries referred to in our report dated
February 8, 2000, which is included in the annual report to security holders and
incorporated by reference in Part II of this form, we have also audited Schedule
II for each of the three years in the period ended October 31, 1999. In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
Los Angeles, California
February 8, 2000
<PAGE>
SIGNATURE EYEWEAR, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
OCTOBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
Additions
Balance at Charged to Deductions
Beginning Costs and from Balance at
of Year Expenses Allowance End of Year
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Year Ended October 31, 1997:
Allowances deducted from related balance sheet accounts:
Accounts receivable $45,000 $ 15,316 $0 $ 60,316
======= ======== == ========
Year Ended October 31, 1998:
Allowances deducted from related balance sheet accounts:
Accounts receivable $60,316 $ 11,152 $0 $ 71,468
======= ======== == ========
Year Ended October 31, 1999:
Allowances deducted from related balance sheet accounts:
Accounts receivable $71,468 $126,895 $0 $198,363
======= ======== == ========
Inventories $ 0 $ 63,368 $0 $ 63,368
======= ======== == ========
</TABLE>
